by Toby Lewis, Chief Investment Officer, Centrepoint Alliance
Last night, 9 May 2017, Treasurer Scott Morrison handed down a very restrained Federal Budget. And while the government’s marketing campaign runs the headline of stronger growth and better paying jobs, the detail suggests that the gains will be slow to accrue.
The Treasurer expects that GDP growth will increase from 1.75% to 2.75% next year as the after-effects of cyclone Debbie and the drag of the reduction in mining investment continue to wane.
Household consumption, exports and non-mining investment are expected to lift growth, but there is little in the budget to offer an immediate boost. The budget strategy focuses on longer-term measures to lift productivity. In particular - infrastructure investment, housing affordability and financial services reform all feature prominently.
In terms of the likely implications for investors, shareholders will be pleased to receive confirmation of the commitment to reduce corporate tax to 25% by 2026-27, although lower imputation credits will be a secondary implication.
On the other hand, the new six basis points levy and competition measures for the major banks will have a noticeable negative impact on future earnings growth. Direct property investors may be dismayed to see some of their deductions curtailed while measures to promote the development of affordable housing might only affect prices in particular areas.
There is better news for bondholders as growth and inflation are likely to increase only moderately. In addition the net borrowing requirement is forecast to decline over next three years before a surplus is delivered in 2020-21, implying there will be a decline in annual issuance of new debt. Both imply little upward pressure on yields stemming from the domestic economy. However the Treasury has published some aggressive forecasts and there is a strong chance that actual economic performance might not be strong enough to return the budget to surplus over the projected timeframe.
Summary of key forecasts and measures
- $75 billion for transport infrastructure over ten years.
- Western Sydney Airport work to commence by end 2018.
- Melbourne to Brisbane inland rail to commence in 2017-18.
- Additional support for Melbourne airport rail link, Queensland’s Bruce Highway, WA’s METRONET, and the Western Sydney Infrastructure Plan.
- Establishment of the Regional Investment Corporation.
Measures affecting businesses
- $20,000 immediate deductibility extended for a further year for businesses with less than $10 million turnover.
- Reduction in the corporate tax rate to 25% by 2026-27 (which will reduce the value of imputation credits).
- More flexible ways to raise capital through crowdfunding.
- $300 million over two years under the new National Partnership on Regulatory Reform to incentivise States and local governments to lessen the regulatory burden on small businesses and remove other restrictions that hinder economic growth and competition.
Incomes and affordability
- 32.5% personal tax income threshold increased from $80,000 to $87,000 to minimise bracket creep until 2019-2020.
- Increase in Medicare Levy from 2% to 2.5% from 1 July 2019 to fund NDIS.
- 7.5% increase in university fees phased in over four years. Changes to HELP repayment thresholds from 1 July 2018.
- First home buyers will be able to salary sacrifice a maximum $30,000 (max $15,000 in any year) for a housing deposit in an account held with superannuation.
- Homeowners aged over 65 can make up to $300,000 non-concessional contribution into superannuation from the proceeds of the sale of a principal residence when downsizing.
- Further measures and incentives to free up Commonwealth land and promote affordable housing development.
- Introduction of a 50% cap on foreign investment approvals for new developments.
- An annual charge to foreign owners that leave properties vacant for more than six months of the year.
- Disallowing travel deductions for residential investment property.
- Limiting deductions for plant and equipment forming part of residential property investments and redirecting to expenses investors have directly incurred themselves.
- A six basis point levy on banks with greater than $100 billion in liabilities, encouraging competition from smaller rivals. This is expected to raise $6.2 billion over the forecast horizon.
- New Banking Executive Accountability regime with “enhanced powers and functions for APRA to increase consequences for banks and their senior executives when they fail to meet expectations”.
- New framework for dispute resolution with the creation of the Australian Financial Complaints Authority.
- Measures to increase competition and innovation in financial services, including a less onerous testing process for new products and services, removing the double taxation of digital currency and extending the legislative framework for crowd-sourced equity funding to include proprietary companies.
- A Productivity Commission 12 month review of competition in the financial services industry, commencing 1st July 2017.
Communicating with your clients
To help communicate the major announcements from the Federal Budget with your clients, Centrepoint have prepared some materials for our adviser community, including:
- A written summary outlining the major announcements
- An infographic with key data and statistical information
- An animated video highlighting key changes and potential impacts