Last year in December I noted the following in my Market Wrap 23/12/2016.
1. The stock market will push its way back to 6000 points, so far it has hit a high of 5975, and we still have 7 months.
2. Interest rates will move up, which we have already seen.
3. Governments will announce infrastructure spending.
See for yourself http://growyourwealth.com.au/market-wrap1/2016/12/23/market-wrap-23-12-2016 .
The 2017 Budget in Australia was an infrastructure budget. This will bring employment and drive the economy. In times of recession, the Governments role is to stimulate the economy, which is what this budget is going to do.
What does this mean for debt, 10 years ago Australia had debt of $53 billion at present this figure is around $500 billion. Under this budget this is expected to increase further, case in point is Mr Morrison has raised the Australian debt ceiling to $600 billion.
The budget is forecast to hit surplus in 2020-2021 year, this is good news however it is still a long way between now and then and a lot will depend on the economy improving.
Let’s take a closer look to see who are the winners and losers.
The winners here are:
Jobs- Infrastructure spending will create jobs. Keep in mind that for every dollar the government spends private enterprise will spend another $2 to $3. Unemployment is high in Australia, the way to solve this is to build and build, which is exactly what the government is doing. They are building infrastructure which will improve productivity long term. Nation building activities. I will take time before we see unemployment and under employment improving but at least it has started.
NDIS - The National Disability Scheme, will now be fully funded. This I am sure will be welcome news for the Disabled Australians. Allowing them to take control of their futures.
Self-Funded Retires – have over the past year had a number of restrictions placed on them in regards to increasing the money they have in superannuation. They now have the ability to make contributions to super from the proceeds of the sale of the family home. These contributions which are $300,000 per person are separate to the new non concessional caps limits and are not governed by the $1.6 million cap rule.
This measure is a big plus in my book, it is available to individuals between the age of 65-75 which is generally when retirees start looking to downsize and generally have issue in making further contributions to superannuation.
Age Pensioners - who recently lost the concessional cards will get it back. Once again unwinding a very unpopular change which happened last year. These pensioners were in the high income levels and the concessional card was all the benefit that they received. This will take effect on the 01/07/2017, so if you were one of the people who lost the card make sure you apply for it again.
Small Business – the big and long awaited news here is the tax cuts that they will receive. Now keep in mind that small business employs around 40% of Australians. This budget will move the goal posts so that now small businesses with a turnover of under $10 million will have its tax rate reduced to 27.5%.
This rate will start to drop in the 2025 year to 27% and then decrease each year by 1% finally reaching a rate of 25% in the 2027 tax year. Keep in mind that Australia has one of the highest company tax rates. A drop in this rate will make us more competitive on the world stage and attract more businesses to Australia.
The number of small businesses who can avail themselves of these lower rates will increase as the turnover limits are increased. In 2018 tax years they will include businesses with turnover below $25 million and in 2019 businesses with turnover of less than $50 million.
Best of all the rate of this financial years ending 30/06/2017 will be reduced from 28.5% to 27.5%. On top of this the current policy allowing small business an instant write off for assets costing less than $20,000 will continue.
Finally, small businesses are no longer required to administer paid parental leave payments. This is a massive time consuming job for small business. Governments departments will now do this as they always should have.
Earlier budget measures which have been abandoned:
1. Increasing the age of eligibility for Newstart and Sickness Allowance
2. Cessation of the education entry payment
3. Pharmaceutical benefits scheme – increase in thresholds
4. Australian working life residence
5. Youth Employment Strategy – revision of waiting periods for youth support
6. Family payment reforms
7. Increase to family tax benefit Part A.
The losers will be:
Unfortunately someone has to pay for the above expenditure, the government has been quite tricky here and although it appears that the big bad banks are going to foot the bill I can assure that it will be the average tax payer.
$6 Billion Bank Levy - Everyone who holds bank shares, has a loan with a bank or a deposit account, will pay this levy as the banks seek to claw back the $6.2 billion. This measure is just a money grab by the governments from our best performing companies. It is easy and popular to bash banks; however, we all use them and need them.
All of us have superannuation of which some of the funds are invested in the banks, we will be affected as this levy represents around 5% of their profit. This need to come from somewhere. Given bank yields are historically high you can guarantee that dividends will be cut. This will reduce the return on your superfund.
Next you can expect to see interest rates increase on loans, my guess is that this will start with commercial lending first, move into fixed rate loans, investments loans and finally owner occupied loans if needed.
For those holding cash or term deposits do not expect to see and rate rises unless the Reserve Bank makes them. However the banks may not pass them on.
That said keep in mind that the banks are backed by the government as such loss of capital from the banks collapsing is very unlikely. As such if dividend yields move back to historic rates of 5% this is still better then bank interest.
Everyone who pays Medicare Levy - from the 01/07/2019 the Medicare levy will increase from 2% to 2.5%. The funds are to assist with covering the costs of the NDIS, which is why the increase is delayed until the funds are needed in 2019.
This will sting all of us given the levy was only raise two year ago from 1.5% to 2.0%, the offset to this is the budget repair levy has been repealed however this only affected people making more than $180,000 pa.
On the bright side, the Medicare Levy low income thresholds have also been increased. These thresholds are the level of income you have to make before you pay any Medicare levy. The lower level which is when you start to pay has been increased to $21,655 for singles and for families to $36,541 plus $3,356 for each child.
Investment properties – If you own investment properties there are a number of changes which will affect you some in regards to holding residential property inside Superannuation and others investing in property outside of superannuation.
Travel deduction – the cost associated with travel to inspect your investment property is no longer an allowable deduction in your tax return as of 01/07/2017. It seems that too many people were writing off holidays as a property inspection trip.
Depreciation will now only be able to be claimed on plant and equipment which you incurred actual expenditure. As such if you purchase a property with the assets already there you will not be able to claim the depreciation expense. This is a catch for those buya second hand house.
Finally those looking to buy investment property through a Self-Managed Super Fund, your limited recourse borrowing loan will be included as part of your superannuation balance. This may affect your ability to make non concessional contributions. If the value of your superannuation balance added to the value of the limited recourse loan is greater than $1.6 million you will not be able to make non-concessional contributions.
Government Benefits – there are a number of changes making it harder to access government benefits including:
Longer waiting periods depending on personal assets. This is the extension to the Liquid Asset Waiting Period (LAWP).
· There will also be changes to the Newstart Activity tests for over 55’s. From 20/09/2018 the following changes will come in:
o If you are aged between 55-59 you will only be able to meet your half of your participation requirements through volunteering.
o If you are aged 60 – age pension age you will have an activity requirement of 10 hours per fortnight.
Residency requirements will change on the 01/07/2018, you must meet one of thefollowing:
o 15 years continuous Australian Residence
o 10 years continuous Australian Residence with 5 of these during your working life.
o 10 years continuous Australian Residence without having received an activity tested income support payment for a cumulative 5 year period.
There will be reform to working age pensions as follows:
o From 20/03/2020 Newstart and Sickness allowance will be changed to Jobseeker Payment at the same rate.
o Widow Allowance will close to new entrants as at 01/01/2018 and cease on the 01/01/2022.
o Bereavement Allowance will cease as of the 20/03/2020.
o Wife Pension will transfer to Age, Carer or Jobseeker payments as at 20/03/2020.
o Partner Allowance will cease on the 01/01/2022
o Widow B Pension will convert to Age Pension on 20/03/2020.
First home buyer measure will have no effect on property prices and I expect there will be little take up on this. This measure allows first home buyers to put up to $30,000 in their super fund through salary sacrifice; they will later be allowed to take these funds out to purchase a property.
I am not sure what the government is trying to achieve here. In the budget they took some measures to discourage investors in the property sector. They also brought measures to force foreign owners to rent their investment properties in Australia out or face a $10,000 levy. The idea being that this will free up property for sale.
The issue with property is jobs and income, properties now and over 5 times the average income making them unaffordable unless prices drop or wages increase. On top of this are the high levels of unemployment, regardless what they do until unemployment reduces property will be out of the reach of many.
If you would like to find out more how the budget affects you call Grow Your Wealth on 07 4771 4577 or email at firstname.lastname@example.org
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