The federal budget is unlikely to have an immediate impact on the property market and returns for investors. But with changes to many tax concessions for super savings, the long-term picture may be different.
By leaving negative gearing alone in his first federal budget, Treasurer Scott Morrison seems to be aiming to keep things stable in the property investment market as the boom in real estate prices gradually slows down. But with extensive changes being made to tax breaks for high-value superannuation accounts, we may see a surge in property investing as a tax-friendly alternative to superannuation savings.
2016 budget in brief
Morrison’s budget offered good outcomes for small businesses and middle-income earners, with potential tax savings for both these groups. But it was superannuation reform that dominated the 2016 federal budget. A whole raft of changes was announced, but the ones that could have an impact on the outlook for property investment are:
- Introduction of a $1.6 million cap on funds retirees can transfer from a super accumulation account into a tax-free retirement phase account;
- Higher super contributions taxes for those earning between $250,000 to $300,000;
- Reduction in the annual concessional contributions cap to $25,000 across all age groups; and
- A new indexed lifetime limit of $500,000 on concessional contributions.
Is property a good substitute for super?
Now that higher-income earners and wealthy retirees are facing changes to their super contributions and fund balance options, could they be looking at negatively geared property as an alternative tax haven for their savings? With the Reserve Bank’s 0.25% drop in the cash rate to a record low of 1.75% on the same day as the budget announcement, it’s possible that some people with self-managed superannuation funds will transfer more of their savings into direct investment in negatively geared property as a way of getting tax relief on their retirement savings.
“A cut in the Reserve Bank cash rate will usually have an impact on the number of people looking at buying property – as owners and investors,” says Aussie CEO James Symond. “With negative gearing seemingly here to stay, plus the super tax changes from the 2016 budget, we’d expect there to be a significant number of people revisiting property as part of their overall investment strategy.”
However, with growth in the property market showing signs of slowing, even the added incentive of low interest rates may not make real estate the most attractive alternative for retirees seeking tax efficient investing. Negative gearing benefits can be applied to all types of investments and retirees looking to generate income for their lifestyle could end up moving super savings into shares and managed funds to save on tax and maintain their cash flow.
Will commercial property boom?
Flow-on effects from tax savings for small businesses could ignite renewed growth in Australia’s commercial property sector. If Morrison’s package succeeds in stimulating economic growth for smaller enterprises, there may be a flow on to a growing market for leasing and buying commercial property across all classes – office, retail and industrial.
Want to know more about investment properties in the current economic climate? Speak with a professional financial adviser, or contact an Aussie broker for home loan enquiries.
What did you think of the budget?