The Federal Budget was handed down on 9 May. We analyse the main changes to personal tax, superannuation, banking, and some new superannuation based housing affordability schemes.
From a tax perspective the issue of most interest in the Budget is what wasn’t announced. There was no decision to extend the Temporary Budget Repair Levy beyond FY17. For the last three years this has been an additional 2% tax on people earning more than $180K. Prior to the Budget there was a lot of speculation it would be extended beyond its original end date. But with no extension announced, it should end on 30 June 2017 as originally planned. The marginal tax rate for people earning more than $180K pa should therefore reduce from 49% to 47% from July 2017.
There was an increase to the Medicare Levy announced, which will see it rise from 2% to 2.5% in July 2019. This will effectively raise the tax rate for everyone subject to the Medicare Levy, by 0.5% from that date.
After last year’s major changes to super, there was nothing of great significance this year. Last year’s proposals ended up being delayed and revised, and are scheduled for commencement in July 2017.
There was a surprising announcement of a new levy on the major banks, which will cost them approx $6.2 Billion over 4 years. From a political point of view this will be quite popular with those who hold negative feelings towards banks. Some well informed economic commentators believe it is appropriate from a financial system integrity point of view too.
However from a personal finances perspective, the key question is where will the $6.2 Billion come from? As the head of Westpac said, “there is no magic pudding”. Ultimately it has to come from a mixture of reduced investment returns for bank shareholders and increased costs for bank customers. Exactly how this mix is allocated remains to be seen. But with a majority of Australians owning bank shares via their superannuation, as well as being customers of the major banks, the $6.2 Billion bank levy will effectively flow through to them. Those with high concentrations of bank shares in their super and investment portfolios, and those with loans from major banks, are likely to shoulder most of the burden.
Superannuation based Housing Affordability Schemes
Housing affordability is becoming a major social issue in Australia as property prices continue to accelerate well beyond historical and international trends, and younger people are struggling to buy their first home. The government has proposed two superannuation based schemes in the Budget, which it claims will improve housing affordability.
The first involves using superannuation to save for a first home deposit in a more tax effective way. The upper limit per person is $30K, and there are many other finer detail controls and restrictions. Significantly, this scheme does NOT allow people to use any of their existing superannuation balance or their ongoing compulsory contributions to purchase a home. Nor does it allow them to exceed their usual superannuation contribution caps. It is essentially just a vehicle for first home buyers to reduce tax on some of the savings they are putting aside for a home deposit. It is a very similar concept to the “First Home Saver Accounts” introduced some years ago. That scheme was subsequently abandoned due to lack of interest from consumers. It was widely regarded as being too complex and inflexible for the marginal benefits it provided.
The second scheme provides an option for people over 65 who are downsizing their home, to contribute up to $300K each ($600K per couple) of their property sale proceeds to superannuation without the usual contribution restrictions related to age, work status, or caps. The theory is that this will encourage more older people to downsize, thus increasing supply and lowering the cost of larger homes more suited to younger families. For a downsizer it potentially enables them to reduce the tax otherwise payable on investment earnings of their net sale proceeds, due to this amount being held inside superannuation rather than as a normal investment. However when older people are surveyed on the reasons they choose not to downsize, this is rarely a consideration. Age pension benefits, stamp duty costs, and emotional attachment, tend to be much more important reasons for older Australians staying put in large houses.
Time will tell if these two new schemes are practical solutions to housing affordability, or just political distractions.
All of these proposed changes from the Budget are still subject to passage through the parliament, and clarification of the finer details. Please let us know if you would like advice on any of these issues in relation to your own specific situation.