Federal Budget 2017: The super pros and cons

 Piggy bank with tight belt






SUMMARY: Super bonus for downsizing retirees the upside, property tax deductions the main downside from Federal Budget 2017.

If you are a self-managed super fund trustee, it’s safe to take a breath. Take in a deep one.

The Federal Budget was one that largely left SMSFs alone. It absolutely needed to be – with all the changes coming into effect on 1 July 2017, any further changes might have seen the whole one million of us heading to Canberra to tar-and-feather Treasurer Scott Morrison.

SMSFs didn’t get off, ahem, Scott-free. ScoMo did leave a few hidden nasties in there. But it wasn’t on the scale that I, for one, had feared might occur, as part of an irrational response to budgetary pressures.

For a start, limited recourse borrowing arrangements (LRBAs) are safe. That they might be banned was my single biggest concern. I’ll come back to to this.

And, arguably, the biggest negative for SMSFs is a measure that actually wasn’t aimed at super funds at all.

The big (largely) positive super changes are:

  1. Older Australians will be able to dump $300,000 from “downsizing” home into their super.
  2. Younger Australians will be able to save up to $30,000 towards buying their first home via accessing “salary sacrifice” style tax deductions.
  3. Some other minor impacts, such as the new 0.06% tax on banks that will, potentially, lead to lower bank dividends for SMSF investors.

The big negative? This is the removal of depreciation for property investors on “plant and equipment”, for properties bought after 7.30pm on Budget night. So, thankfully, it is prospective. And it will have a bigger dollar impact on non-super investors than SMSF investors.

What does it mean? When you purchase a property, there are two non-standard potential tax deductions that might assist with the annual cash flow of a property investment.

These are known as the “capital works” depreciation allowance and the “plant and equipment” depreciation allowance.

The former allows you to depreciate the cost of the bricks and mortar of a property at 2.5%, for 40 years after a property was built. It seems, for now, that this is safe.

“Plant and equipment” are the, largely, replaceable items that will generally need to be replaced over time. These can include air conditioners, carpet, blinds, stoves, washing machines, fridges, sinks, light fittings, etc. They depreciate at different rates, over different time periods, typically between three and 15 years.

Traditionally, when you buy a property, particularly a reasonably new one, you would get a “depreciation schedule”. You would get an expert to wander through the house and tell you what lifespan these sorts of items had left. And you could then claim them gradually until they had a value of $0, against the income received for the property.

From Budget night onwards, any purchaser will not be able to claim these as tax deductions, unless they have physically spent the money buying the item themselves, post-purchase.

This can, depending on the cost of items in the property, lead to annual tax deductions of many, many thousands of dollars for a property investor. Possibly even tens of thousands of dollars for more expensive properties.

For existing property investors, your deductions are safe.

But it is going to change the numbers for property investment going forward for new purchasers. Probably to the tune of a few thousand dollars a year, that peters out over time – as those items depreciate down to having no value anyway.

Anything that an investor does purchase as a replacement item will receive regular depreciation.

Downsize and dump $300k into super

If you are over 65, you will be able to sell the family home and dump up to $300,000 into super, as you downsize your living quarters.

This is a positive move for those wanting to do so. The current rules offer little opportunity or flexibility for people wanting to do this.

If you downsize and realise a lump sum, you face difficulties in getting any money into super, under current rules. If you are over 65, in order to make any contribution to super, you would then also need to meet the work test. But this would allow you to put in $300k from the sale of your home and then, potentially, a further $25k (from 1/7/17) into super via concessional contributions and up to $100,000 in non-concessional contributionsm, if eligible.

First Home Super Savers Scheme

The day after the Rudd Government introduced its four-year First Home Savers Accounts in 2008, a colleague asked me what I thought of it. My response was, only a little facetiously, that “it had a total market in Australia of exactly 17 people”.

My reasoning was that it actually locked people out of the property market for four years. If you bought inside four years, your money got forfeited to super. It was the single dumbest “affordability” policy I had ever laid eyes on.

And it turns out my “17” people wasn’t far off the mark. And I was certainly closer than Kevin Rudd’s estimate. Rudd predicted 750,000 accounts would be opened within four years.

When it was axed, just 46,000 FHSA had been opened in about six years. My cynical, off-the-cuff, costless guess was “out” by less than 50,000. His Treasury-backed forecast, that probably cost hundreds of public servant hours, was out by more than 700,000.

The new Scott Morrison version appears to make more sense. Participants would only locked out for one year – and I’m not even convinced that’s the case, to be honest. But we need to see the fine print.

You can make salary sacrifice-style contributions to super. At most for $15,000 a year. And over the course of your use of the program, to a maximum of $30,000.

You will then only be able to draw that amount out of super, plus a small amount of earnings, to put towards your home deposit.

Anything you draw out to pay for your home will be taxed at normal tax rates, less a 30 percentage point rebate. So, those earning less than $37,000 (which will include whatever is drawn from this) will pay no tax. Those earning between $37,000 and $87,000 will pay approximately 4.5% tax. Above that, you will pay between 9% and 17% tax (but you got a bigger tax deduction on the way in).

This is done without having to create a new account, like Rudd’s FHSA. You don’t have to lock yourself out of the property market for four years, like Rudd’s FHSA.

A further bonus is that it won’t have to be done via salary sacrifice, because the rules surrounding salary sacrifice are changing on 1 July.

From 1 July, anyone will be able to make a tax deductible contribution to super. (This is a big benefit, because employers are not required to offer salary sacrifice to employees.)

And, as a further bonus, it will probably also get younger Australians to understand the value of salary sacrificing, or making further contributions to super.

LRBAs safe … for now

My biggest fear from the Budget was that they might ban super fund borrowing.

The fear was that a government desperate to be seen to be doing something on housing affordability would take out one, small, investor out of the market – SMSFs.

That fear came to nothing. Instead, they moved to further restrict foreigners investing in property, which will, arguably, have a far bigger impact than banning about 5000 SMSFs from investing in property each year.


The information contained in this column should be treated as general advice only. It has not taken anyone’s specific circumstances into account. If you are considering a strategy such as those mentioned here, you are strongly advised to consult your adviser/s, as some of the strategies used in these columns are extremely complex and require high-level technical compliance.

Bruce Brammall is managing director of Bruce Brammall Financial and is both a licensed financial adviser and mortgage broker. E: bruce@brucebrammallfinancial.com.au . Bruce’s new book, Mortgages Made Easy, is available now.


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