THE URBAN DEVELOPER comment on Federal 2017 Budget:
What’s In Store for Australia’s Development Industry?
Australia’s financial roadmap was released at 7.30pm on Tuesday, March 9, 2017, when Treasurer Scott Morrison handed down the Federal Budget 2017-18.
According to commentary by Value Beyond, the budget forecasted a cash deficit of $29.4 billion, moving to a projected surplus by 2020-2021, and expected growth to increase to 2.75% for 2017-2018 and 3.00% in 2018-2019. Measures were outlined to tackle cost of living pressures, including childcare and energy, and funding increases were declared for health and schools.
But what about the development and property industry?
The Housing Industry Association said this budget marks a shift towards a more expansionary fiscal strategy. There are duel motivations for this: firstly to achieve an economic objective of stimulating private sector investment, and secondly, a political objective whereby the Prime Minister is seeking to differentiate the strategy of the current government from the Abbott/Hockey era.
“In laying the groundwork for new fiscal strategy and moving away from the ‘budget emergency’ rhetoric, the Coalition are hoping to have given themselves more flexibility than they have had in any year since winning government back in 2013,” the HIA said.
“However, analysts will still be closely scrutinising the increase in borrowing irrespective of whether it is classified as ‘good debt’ or ‘bad debt’. Public sector investment in key infrastructure is essential for our ongoing prosperity, however it is also important for the government to address the structural deficit between revenue and expenditure.”
Industry-related budget measures announced included:
- Establishing the National Housing Finance and Investment Corporation
- Establishing $1 billion National Housing Infrastructure Facility
- Commitment to identify underutilized commonwealth land suitable for residential development
- First Home Super Saver Accounts
- Reducing barriers to downsizing
- Tighter restrictions and additional taxes on foreign and temporary residents
- Renewed commitment to the National Affordable Housing Agreement
- Increasing the capital gains tax (CGT) discount for investors in affordable housing
- Encouraging Managed Investment Trusts (MITs) to invest in affordable housing
- ‘City Deals’ Housing package for Western Sydney
- Small changes to negative gearing or capital gains tax
- Commitment to build the second Sydney Airport at Badgerys Creek
- Apprentice training.
Industry-related budget announcements and commentary
Affordable Housing Investments
According to Value Beyond, resident individuals will get a 60% capital gains tax discount (compared to current 50% discount) for investments in qualifying affordable housing. The investment must be held for a minimum of three years.
Investment into affordable housing is encouraged through the budget by enabling Managed Investment Trusts (MITs) to invest in affordable housing. To receive concessional taxation treatment, the housing must be available for rent for at least 10 years, and the MIT must derive at least 80% of its assessable income from affordable housing.
Richardson & Wrench Real Estate Managing Director Andrew Cocks believed Budget passed the test for fairness and responsibility whilst offering some innovative opportunities that will support and encourage affordable housing for those most in need.
“Overall the Treasurer has crafted a careful plan for housing that addresses supply side factors without taking drastic measures that would undermine confidence or investment in housing,” Mr Cocks said.
“He has provided a means for first home buyers to accelerate savings through voluntary contributions to super taxed at 15 per cent. In practice, these tax concessions will only benefit those first home buyers on higher incomes or who are looking to purchase in areas where average property values have not escalated at the stellar rates seen in our biggest cities.
“However the reality is that even the well-paid are struggling to buy a first home in Sydney and Melbourne.”
Mr Cocks said the 60 per cent capital gains tax discount to investors in affordable housing was a necessary measure to encourage the private sector to participate in meeting the growing need for housing amongst the low-paid and welfare beneficiaries.
“As the Treasurer pointed out there are no silver bullets for affordable housing and while first home buyers are locked out of home ownership there will be more demand for private rentals, making it even harder for those already struggling with cost of living pressures.”
Frasers Property was pleased to see the issue of housing affordability given real focus.
“The Treasurer is correct however, there is no silver bullet and it is a complex issue,” Frasers Property General Residential Manager Anthony Boyd said.
“Affordability is a real issue, particularly in Sydney and Melbourne and supply is the major driver that will have the greatest impact on making housing more affordable.”
DevelopmentReady.com Managing Director Nick Materia said from a developer’s perspective, the new housing affordability measures are positive, particularly for developers in the townhouse and new house build space – allowing first home buyers to contribute additional capital to the super without being taxed at the marginal rate.
“This will likely, particularly over the next 12-24 months, increase the buying pool for well positioned and quality projects close to major metropolitan cities,” he said.
Infrastructure
Scott Morrison’s budget talks a big book on infrastructure and is predicated on an economic upswing in Australia and around the world, said the Property Council.
However, Consult Australia Chief Executive Megan Motto was of a different mind.
“This was budget big on planning for longer term infrastructure dividends,” she said.
“It recognised infrastructure as a tool to increase productivity, the importance of business case development to get the right projects off the ground, and the role of government in being able to drive economic growth.
“Over $14 billion of direct government equity in major infrastructure delivery and financing agencies. Major projects like Snowy Hydro, Inland Rail, a National Rail Program, and Western Sydney Airport, all point to a government that understands the long-term nature of infrastructure projects.
“Yet in the short term there is a sense of missed opportunity,” she said.
“Historically low bond rates and a triple-A credit rating means it has never been a better time to borrow, to take on more good debt, yet as a share of GDP, spending will drop from 25.5% to 25.2% in 2020-21.
Ms Motto said she believed real spend on infrastructure delivery will fall.
“Added to this a foreign worker levy for business that will make it harder for business to bring in skills needed to deliver Australia’s infrastructure agenda.
“This is an Infrastructure Budget 1.0 that begs for an Infrastructure Budget 2.0 to better connect the strong sense of direction to implementation and the opportunity for Australia to maintain future economic growth.”
First Home Super Saver Scheme
Value Beyond said the Budget allowed for future voluntary contributions to superannuation made by first home buyers from 1 July 2017 to be withdrawn for a first home deposit, along with associated deemed earnings.
Concessional contributions and earnings that are withdrawn will be taxed at marginal rates less a 30% offset, and up to $15,000 per year and $30,000 in total can be contributed, within existing caps (from 1 July 2017 concessional contributions cap of $25,000, and non-concessional contributions cap of $100,000).
Property Council of Australia Chief Executive Ken Morrison said addressing the deposit gap for first home buyers is a critical part of addressing our housing challenge.
“Our fear was that a scheme that used superannuation would be inflationary. However, the architecture of the First Home Super Scheme appears to be a non-inflationary measure that will help hundreds of thousands of Australians save for a deposit for their first home.
“The Budget offers substantive policy solutions to many of the challenges facing home buyers and renters on low incomes.”
Oliver Hume Joint Managing Director Queensland Brinton Keath welcomed the housing affordability package and noted the multi-faceted approach to bring new home owners into the market, particularly the thriving house and land market.
“Following the budget announcements, we expect the bigger blocks of land on offer at quality developments such as Providence Ripley in Queensland to become even more popular, with buyers being able to afford larger lots in favour of seeking potential capital growth,” he said.
Foreign Property Owners
According to Value Beyond, foreign resident capital gains tax withholding will increase from 10% to 12.5%, and the threshold reduced from $2 million to $750,000, which will affect all property sales with values over $750,000.
The Budget introduced a charge on foreign owners of residential property where the property is not occupied or genuinely available for rent for at least six months per year. The charge will be equal to the foreign investment application fee imposed on the property at the time it was acquired by the foreign investor.
Foreign and temporary residents would be denied access to the CGT main residence exemption from 9 May 2017, with existing properties grandfathered until 30 June 2019.
“Our only disappointment with the Budget is that the Government has announced a range of measures aimed at punishing foreign investors,” Property Council of Australia Chief Executive Ken Morrison said.
“These seem designed to provide the government with a few good headlines but these measures will do nothing to improve housing affordability and potentially send a message about Australia’s openness to investment.”
The HIA was also concerned about the negative impacts on residential building from the Budget’s measures on foreign investment.
“Plans to tax vacant homes, limit the share of foreign investment in new projects and increase foreign investor duties all send exactly the wrong signal to potential investors in Australia,” HIA Deputy Managing Director Graham Wolfe said.
“Barriers to investment are not productive for the building industry or the economy more broadly; investment needs to be encouraged.”
Investment Property Owners
The Budget proposed removing deductions for travel costs for inspecting investment properties, according to Value Beyond.
Deductions would also be limited for plant and equipment forming part of residential investment properties to expenses that the investors have directly incurred themselves. Existing plant and equipment will continue to be deductible until either the property has been sold, or the item reaches the end of its effective life.
Such a move was intended to remove the major benefit of depreciation when purchasing a property, which may affect depreciation on newly built properties purchased from developers.
Also mentioned in the Budget
“Linking the National Housing and Homelessness Agreement’s $1.8 billion to the states and local governments delivering improved housing supply and better planning systems is a significant and welcome reform,”HIA Deputy Managing Director Graham Wolfe said.
“The ‘city deals’ expansion into smaller scale projects is also a welcome development: the big ticket projects are important but much can be achieved by removing obstacles to more efficient delivery of homes.”
For businesses, changes in the Budget were minimal, with the corporate tax rate cut to 27.5% for businesses with turnover under $50 million passing through Parliament only in the last few weeks.
The Budget announced an extension of the immediate deductibility of assets costing less than $20,000 through to 30 June 2018, and the taxable payments reporting system to contractors in the courier and cleaning industries from 1 July 2018.
Tax rates linked to the top personal tax rate, such as FBT rate, to increase from 1 July 2019 due to increase in Medicare Levy – e.g. FBT rate to change to 47.5% (after dropping from 49% to 47% due to the removal of the 2% Temporary Budget Repair Levy).
From 1 July 2018, purchasers of newly constructed residential properties or new subdivisions will be required to remit the GST directly to the ATO as part of settlement.
According to Value Beyond, this should be taken care of as part of the conveyancing transaction which means minimal impact for the purchaser. However it does mean that developers don’t collect the GST money from the vendor and then remit it to the ATO, thereby losing the use of that money which they may currently be able to use to their benefit in the short term (for example, to pay down debt, or to pay contractors).
The government will introduce a Banking Executive Accountability regime, to make banking executives more accountable with higher penalties for breaches. A major bank levy will also be introduced on banks with liabilities greater than $100 billion, raising at least $1.5 billion per year.
The government is also expected to establish the Australian Financial Complaints Authority for financial disputes resolution.
Despite a few rare points which were considered objectionable, the industry has generally welcomed the announcements and intentions outlined by the Federal Budget in 2017, and looks forward to a healthy Budget period and prosperous future.
