Property lessons from last year's federal budget

With Easter out of the way, we enter the federal budget preview season. Between now and when Treasurer Scott Morrison stands up in Parliament House on the night of Tuesday, May 8, to deliver his speech, there will be abundant clues and hints dropped by the government about its plans.

While pre-budget speculation is a part-and-parcel parlour game of modern political life, I want to consider something we know far more about: the impact of the 2017 federal budget has had on the property market. Happily the news is good.

Typically, federal treasurers have little to say about property on budget night. Investors tend to pay more attention to their home state's counterpart, given stamp duty and land tax jurisdiction sits within the lower strata of government. But the 2017 federal budget was unusual because of the number of announcements that targeted residential property.

Most striking were initiatives aimed at foreign investors and the new properties that this cohort is allowed to purchase, much to the consternation of the development industry. Perhaps the most profound decision was an immediate 50 per cent cap on the total proportion of dwellings within a project that a developer can sell to foreign individuals. With the stroke of a pen, the Treasurer had seemingly destroyed the business case for numerous new developments in our capital cities.

Expat community

Nearly as significant for its eventual potential impact on overseas demand – but less talked about at the time because the main provision doesn't come into effect until June 30, 2019 – was the announcement that foreign residents will be excluded from the capital gains tax exemptions on their main residences. Troublingly for the large Australian expat community, recently introduced legislation confirms that many overseas Australians who retain property here could also be subject to this provision. With the CGT exemption still in place until June 30, 2019, we face the prospect of a rush to the exit by some expat and foreign property owners before this date.

The Treasurer also added a vacant property tax aimed at foreigners, whereby those who left an asset unused for more than six months of the year would be subject to a fee as high as $5000 a year. These federal initiatives were especially alarming to developers who were still reeling from hikes to stamp duty for foreign buyers imposed the by state governments in NSW and Victoria. Queensland later followed suit.

Further woes for developers came in the form of a scaling back of depreciation deductions. As of July 1 last year, property investors can no longer claim depreciation deductions for plant and equipment outlays made by previous owners, unless the equipment was in place by May 9, 2017. This initiative was expected to reduce the attraction to investors of properties sold with expensively fitted kitchens and living spaces, which are often a centrepiece of contemporary apartment development marketing.

Approvals up 12pc

Lastly, from July 1 last year property investors were no longer able to deduct the cost of travel expenses related to owning a residential investment property.

So did these measures harm the property market? Not really, is the short answer. Yes, there does seem to have been a pullback in overseas buyers. An ANZ/Property Council industry survey shows that the percentage share of total residential sales going to offshore buyers fell to 16 per cent in March 2018 from 21 per cent in March 2017. But overall, the 2017 budget hasn't stymied construction activity as much as was feared, with building approvals up 12 per cent in January on a year earlier.

More broadly, property prices have held steady in most states and territories since May last year. So even though the 2017 budget was perceived at the time to be a rare fiscal challenge for property, the lesson as we go into the 2018 budget season is not to worry about the impact of tax announcements on the residential market.

For more information about financial planning for Aussie expats, please visit the Whole Wealth Expatriate Page.

This article was published and provided by the Australian Financial Review.

#expats #property #budgetchanges #tax


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