BUDGET: Investors should feel more comfortable
PROMOTING investor confidence stands out for Seniors as a key summary of the Federal Government's 2017-18 Budget announcements last night.
But within the long list of budget items are buried some interesting financial and social decisions that will impact on the Seniors community which the chief executive officer of the Sydney-based boutique family and business advisory firm, Chapman Eastway, Sean Cortis, has spelt out.
- Major bank levy - introduction.
The average investor has within their superannuation fund or their savings a pretty large exposure to the big banks. I don't think it's going to hit the deposit monies, it will actually hurt the capital value of their investment.
It's a measure which is really going to drive competition.
If the big banks are seeking to recover that levy from deposit holders with lower rates, I think people will go to smaller banks and building societies that won't be impacted by the levy. I think the smaller guys will be even more competitive.
Cost of living
For the foreseeable future I think we are in a lower interest rate, lower inflation type of environment. The cost of real estate will be the only hurdle, still.
Otherwise, I don't see much changing, but I also don't see much relief unless there is genuine labour productivity reform.
- Reducing Pressure on Housing Affordability - contributing the proceeds of downsizing to superannuation.
The government haven't tinkered with the superannuation rules, which is unlike what they usually do in a budget. They have left CGT concessions and negative gearing alone.
There has been a lot of changes, particularly the recent superannuation cap changes, that has eroded investor confidence.
In this market, people have been feeling very frustrated with all these rules changes; it's harder to invest and getting lower returns and no more money on bank deposits.
For self-funded retirees, it (the budget) leaves them with certainty.
There are three types of people who will think about the downsizing issue -
First is those that have a home and no other savings so they are reliant on the pension. They will be watching the pension tests like a hawk because the home is exempt, but the superannuation is counted towards the pension test. I think people will be scared that if they sell and they do well, and buy something else in downsizing, will they get the maths right and are they going to lose the pension in the changeover.
The second group have got some savings, and maybe borderline on the pension, but are eating into their capital. They may see that they have to sell their home to downsize. Their choice is going to be, do they put their money into super or do they just invest it personally.
The final group is where I see a lot more activity. This is where I think the budget is aimed at where self-funded retirees stay self-funded. If you have money in super and you think you can barely survive so you are taking more than the minimum pension and so eroding your super, you are very vulnerable. You may be thinking the last asset you have is your home and so you are deferring and delaying everything. But for that market, they can now comfortably downsize knowing that there is no impact on their superannuation cap.
- Extending the immediate deductibility threshold for small businesses.
Most wealth in Australia is generated through self-employment and small business. The average business owner is 50-ish. When thinking about retirement, people are often thinking about how do they sell or retire from their business and have some sort of business succession plan.
Broadly, the big issue facing Australia is the succession challenge. I am very disappointed the budget didn't address this issue.
The only thing they have done is plan to put more integrity measures around small business CGT concessions.
The $20,000 immediate business write-off, that's fantastic and will drive investment. It provides an engine room for growth in small business.
Most small businesses fail because they can't fund their growth so the small business tax cuts and immediate write-offs help small business owners fund their businesses and in turn help them fund their retirement.
First home super saver scheme
- Reducing Pressure on Housing Affordability - first home super saver scheme.
I think many Seniors are going to talk to their children and really encourage them to do salary sacrifice, get the extra $30,000 into super and then gap fund them.
It's all about family tax planning. Parents will go to their children, 'you will get the tax benefit of doing this and what you are out of pocket for, I will top you up'.
For a young couple, they get $60,000 together and while it is sitting in super they get all those concessional items, it can grow pretty quickly to say $90,000. I think Seniors are going to say 'how can we help our children to adopt this and if they can't afford to do it, then maybe we will provide some support ourselves for any shortfall'.
Property investment strategies
- Reducing Pressure on Housing Affordability - limit plant and equipment depreciation deductions to outlays actually incurred by investors.
People will be looking at how does the budget affect their investment strategies. On rental properties, I see a big change there.
If you buy a rental property, you can't write-off depreciable assets that were part of the property when you bought it. So, people will look at this and find it's not so attractive as what it was.
Real estate has gone ballistic interest rates are so low, so mum and dad investors that want safety and security want to buy bricks and mortar as they don't want to be exposed to stock market volatility. It becomes a substitute for fixed incomes and fixed returns. The price of property has been driven up as a result.
These depreciation deductions are huge and real estate investors are going to see that.
They are talking about negative gearing staying, but they are also talking about positive gearing, and that provides a very good tax benefit.
What will change is that investors will buy the unrenovated property and do all the extra work on it so they get the depreciation deductions on it, getting an extra $200,000 worth of tax write-offs.
It will change the whole home renovation market.
When the company tax rate falls, the franking credit percentage goes down so when you bank a dividend you pay more tax on it.
When you are in super you are oblivious to it and you get the refund of the franking credits.
With the company tax rate changes and the dropping of the budget repair levy, the higher income earners will be looking at this as can give you an extra 2%or 3% net investment return, and in this market that matters.
For more information on family and business accounting matters, go to www.chapmaneastway.com.au.