This article was written by Ailsa Wallace, Melanie Shaw and Frankie Barbour.
The 2017–18 Budget overall contains only minor changes to personal income taxation. However, it has introduced several significant measures relating to residential real estate.
Personal income tax threshold
As the Government confirmed in the 2016–17 Federal Budget, personal income tax rates and thresholds will remain unchanged for the 2017–18 year. The 2% budget deficit levy will cease to apply from 1 July 2017.
Medicare levy and low-income thresholds
From 1 July 2019, the Medicare levy will increase to 2.5% (up from 2%). This increase will have carry-on effects for other rates that are related to the personal tax rate (e.g. the fringe benefits tax rate).
This change is designed to primarily fund and support the National Disability Insurance Scheme. Any additional contributions raised through the levy will also be applied to support the Medicare Guarantee Fund that will exist from 1 July 2017.
Further, the Government has also proposed an increase to the Medicare low-income thresholds for 2017–18. This increase will continue to apply to singles, families, seniors and pensioners.
Higher Education Changes
The Government has proposed a further $18.6B of spending on schools. However new (lower) repayment thresholds under the Higher Education Loan Program will apply from 1 July 2018.
Domestic real estate – Reducing pressure on housing affordability
The budget introduced several significant measures relating to residential real estate, with a particular focus on assisting Australians to access housing. This follows from intense political pressure at both the State and Federal level for the Government to act to reduce both the cost of residential property and lower rents, especially in major cities. In a press release accompanying the Budget, Scott Morrison described housing affordability as "a major issue affecting many Australians", and stated that the Government was making changes that will "help more people realise their goal of home ownership".
The changes relating to domestic real estate are part of a broader package addressing housing affordability, which also includes changes relating to foreign residential real estate ownership.
Contributing proceeds of downsizing to superannuation
From 1 July 2018, people over the age of 65 will be able to make a non-concessional contribution to their superannuation from the proceeds of selling their home, up to a cap of $300,000. This additional non-concessional contribution will be exempt to existing age test, work test and the $1.6 million balance test. This measure is intended to encourage seniors to sell larger family homes and downsize, such that family-appropriate housing stock is freed up for purchase by younger families.
Disallowing travel expense deductions for residential rental property
To address concerns that taxpayers have been claiming travel deductions without apportioning costs (or claiming them inappropriately), deductions for travel expenses related to inspecting, maintaining or collecting rent for residential rental property will be disallowed from 1 July 2017. However, expenses for real estate agents will remain deductible.
Capital gains discount for investments in affordable housing
The Government has proposed an increase to the capital gains discount to 60% (up from 50%) with effect from 1 January 2018 for investments into affordable housing; that is, housing provided to tenants on low to moderate incomes. Investors will be eligible for the discount upon satisfaction of three additional conditions: namely, the investment must continue for at least three years, the property must be maintained and managed by a registered community housing provider and the rental rate with respect to the property must be below the market rental rate for private properties.
First home super saver scheme
First home buyers will be able to build savings more quickly for a home deposit by salary-sacrificing contributions to superannuation. From 1 July 2018, voluntary contributions (and their associated earnings) made after 1 July 2017 may be withdrawn for a first home deposit. Withdrawals will be taxed at marginal rates, less a 30% offset.
There will be an annual cap of $15,000, and a total cap of $30,000, in contributions for this scheme. For couples, each person can take advantage of this scheme.
Limit plant and equipment depreciation deductions to outlays actually incurred by investors
Depreciation deductions for plant and equipment available to investors will be restricted from 1 July 2017 to where the costs have actually been incurred by the investors in residential real estate properties. This restriction will not apply to deductions in respect of existing investments, and existing plant and equipment forming part of residential investment properties as of 9 May will continue to provide deductions for depreciation until disposal or end of effective life.
The Government intends this restriction to address concerns that depreciation deductions are being claimed by successive investors in excess of their actual value. Investors purchasing plant and equipment after 9 May for residential investment properties will still be able to claim a deduction for the effective life of the property, but subsequent owners will not be able to continue to claim the same deductions.
Existing plant and equipment items acquired will be reflected in the capital gains tax cost base for subsequent purchasers.
For a full analysis of this year's Budget measures, please see Australian Federal Budget 2017-18.