A surplus for now but stormy seas ahead

Treasurer Jim Chalmers bills his 2023 Federal Budget as an economic strategy to help ease cost-of-living pressures.

To that end, he has delivered a modest but welcome package of cuts to healthcare, housing and energy costs as well as boosts to welfare payments for single parents and the unemployed.

Banking an unexpected bonus in increased tax revenue and rising commodity prices, the Albanese government has aimed to help the most disadvantaged while also looking ahead with new plans for renewable energy, defence and the arts.

But it has kept its spending under control to deliver a forecast $4.2 billion budget surplus – the first in 15 years.

The Treasurer sums up his second budget as “a plan for security, for prosperity, for growth”.

The big picture

While the first budget surplus in a decade and a half is to be celebrated, the joy will be short-lived. By next year’s budget, it’s expected there will be a return to small deficits for the next few years.

That’s because the global economy is slowing thanks to persistent inflation and higher interest rates. Aside from the pandemic and the 2007 Global Financial Crisis, the next two years are expected to be the weakest for global growth in more than two decades.

As a result, the government expects Australia’s economic growth to slow from 3.25% in 2022-23 to just 1.5% the following year, before recovering a little to 2.25%.

In this environment, the treasurer continues to mark inflation as the government’s primary economic challenge. He says that is why the budget is “calibrated to alleviate inflationary pressures, not add to them”.

The good news is that the Reserve Bank says inflation is falling slightly faster than it had first forecast and has now passed its peak. It is expected to be around 4.5% by the end of the year, a long way from last year’s CPI rate of 7.8%.

Easing the cost of living

The government’s $14.6 billion package of cost cuts aimed at helping some of those most affected by rising costs covers energy bills, health and medical services, and welfare payments.

There will be energy bill relief to around five million households and one million small businesses. From July 2023, eligible households will receive up to $500 and eligible small businesses up to $650.

The government will also introduce a number of energy saving programs for households including low-interest loans and funds for upgrades to social housing. And there will be access to better information on reducing energy bills.

Health and medical

Countering a major expense for many, the government is pouring in billions of dollars to ease health and medical costs and access to services.

It will spend an extra $3.5 billion to provide incentives to doctors to bulk bill Concession Card holders and children under 16. It’s expected that the increased bulk billing incentive will help around 11.6 million people.

The cost of medicines is also likely to change for many who suffer chronic health conditions. From 1 September 2023, some patients will be eligible to be prescribed two months’ worth of medicine at a time, instead of one month’s worth. It’s expected this change will cut the number of visits to GPs and pharmacies, and the government estimates at least six million people will see their bills for medicines reduced by half.

The government is also providing $2.2 billion over five years for new and amended listings to the PBS, including treatment for cystic fibrosis.

Meanwhile, to improve access to care and reduce the strain on hospitals, a further $358.5 million will be spent to open a further eight Urgent Care Clinics. The clinics will bulk bill and remain open for longer hours.

Welfare boost

Income support payments including JobSeeker, Austudy and Youth Allowance will rise by $40 a fortnight following a concerted campaign by lobby groups in the months leading up to the budget.

And, recognising the extra challenges faced by older people looking for work, those aged 55 and over and out of work for at least nine continuous months, will now receive the higher rate JobSeeker payment currently paid to those over 60. Around 52,000 people will receive the increase of $92.10 a fortnight.

There will be more support for eligible single parents from September 2023. They will receive the Parenting Payment until their youngest child turns 14 (currently up to eight years old). Those receiving the payment will also benefit from more generous earning arrangements compared to JobSeeker. Eligible single parents with one child will be able to earn an extra $569.10 per fortnight, plus an extra $24.60 per additional child, before their payment stops.

Housing assistance

While rents continue to climb sharply around the country, the government has provided only limited assistance to renters. Those receiving Commonwealth Rent Assistance will see a 15% increase in their payments from 20 September 2023.

Eligibility for the Home Guarantee Scheme will be expanded beyond first home buyers to include any 2 eligible borrowers beyond married and de facto couples, and non-first home buyers who have not owned a property in Australia in the preceding 10 years.

The government’s other housing initiatives are medium to long term solutions to the housing crisis.

There are new tax incentives to encourage the construction of more build-to-rent developments. The government claims an extra 150,000 rental properties could be delivered as a result in ten years.

The government is also focusing on providing more affordable housing by supporting more lending to community housing providers for social and affordable housing projects.

Pay rise for aged care workers

Severe staff shortages in the aged care sector, largely been driven by low wages, may abate a little with the government’s commitment to fund a pay rise.

More than $11 billion has been allocated to support an interim 15 per cent increase in award wages.

Support for families

Childcare will be cheaper from July 10, when the government subsidy will increase to 90% for families with a combined income of $80,000 or less.

For families earning over $80,000, the subsidy rate will taper down by 1 percentage point for every additional $5,000 of family income until the subsidy reaches 0% for families earning $530,000.

A more flexible and generous Paid Parental Leave scheme will also be introduced in July. A new family income test of $350,000 per annum will see nearly 3,000 additional parents become eligible for the entitlement each year.

Superannuation

Superannuation is in the government’s sights and employers and individuals with larger balances will be affected.

The concessional tax for those with balances exceeding $3 million will increase from 1 July 2025 to 30%. Earnings on balances below $3 million will continue to be taxed at the concessional rate of 15%.

Meanwhile, from 1 July 2026, employers will have to pay their employees’ super at the same time they pay their wages. The government says that in 2019-20, employers failed to pay $3.4 billion of super owing to their employees.

Looking ahead

The stormy global economic outlook will keep Australia on its toes for the next two years or so but the government has attempted both to support those who are particularly vulnerable now and keep an eye to the future with some bigger thinking.

Moving forward, the government wants to position Australia a “renewable energy superpower” with a new Net Zero Authority to help attract new clean energy industries and help workers in coal regions to find new jobs.

The arts received a boost with almost $1 billion going to art galleries, museums, arts organisations and the film sector to help address “a decade of chronic underfunding”.

And there is the much debated investment in defence – more than $30 billion over the next ten years. Treasurer Chalmers says that while we may have a lot “coming at us – we have a lot going for us too”.

Information in this article has been sourced from the Budget Speech 2023-24 and Federal Budget Support documents.

It is important to note that the policies outlined in this publication are yet to be passed as legislation and therefore may be subject to change.

If you have any questions about how any of these proposed changes may impact your personal financial situation please get in touch on 03 9723 0522. 

Suite 2, 1 Railway Crescent
Croydon, Victoria 3136

Email: integrityone@iplan.com.au

Telephone : 03 9723 0522

Integrity One Facebook

This information is of a general nature and does not take into consideration anyone’s individual circumstances or objectives. Financial Planning activities only are provided by Integrity One Planning Services Pty Ltd as a Corporate Authorised Representative No. 315000 of Integrity Financial Planners Pty Ltd ABN 71 069 537 855 AFSL 225051. Integrity One Planning Services Pty Ltd and Integrity One Accounting and Business Advisory Services Pty Ltd are not liable for any financial loss resulting from decisions made based on this information. Please consult your adviser, finance specialist, broker, and/or accountant before making decisions using this information.

Stay up to date with what’s happened in the Australian economy and markets over the past month.

March was marked by banking failures in the US that sent ripples through global sharemarkets.

However, the first quarter of 2023 ended on a note of optimism in Australia due to better-than-expected inflation figures and expectations of a tempering in rate rises.

Click here for our April update video.

Please get in touch on 03 9723 0522 if you’d like assistance with your personal financial situation.

Suite 2, 1 Railway Crescent
Croydon, Victoria 3136

Email: integrityone@iplan.com.au

Telephone : 03 9723 0522

Integrity One Facebook

This information is of a general nature and does not take into consideration anyone’s individual circumstances or objectives. Financial Planning activities only are provided by Integrity One Planning Services Pty Ltd as a Corporate Authorised Representative No. 315000 of Integrity Financial Planners Pty Ltd ABN 71 069 537 855 AFSL 225051. Integrity One Planning Services Pty Ltd and Integrity One Accounting and Business Advisory Services Pty Ltd are not liable for any financial loss resulting from decisions made based on this information. Please consult your adviser, finance specialist, broker, and/or accountant before making decisions using this information.

In the space of a year – and 10 official interest rate rises – plenty of positively or neutrally geared investment properties have slipped into negative territory. After a significant 3.5% jump in the cash rate, savvy investors are now rethinking their medium to long term strategies.

While some property investors actively choose a negative gearing path, others have only recently found themselves navigating the oft-talked about mortgage method due to the fast-paced interest rate climate. There are tax-related perks that come with negative gearing, but the strategy doesn’t necessarily make sense for everyone. To work out if negative gearing is right for you, it might be time to give your property investment plan a ‘health check’.

Advantages of negative gearing

Put simply, negatively gearing your property investment means spending more on your mortgage interest payments and expenses than you’re getting in rental payments. In this case you’re effectively not earning an income from the property, but it does mean you can write off these losses at tax time. Although the investment property is costing you (rather than providing income), the negative gearing pay day hopefully comes in the form of capital growth.

Disadvantages of negative gearing

While some investors swear by the strategy, negative gearing does come with downsides. You’ll be making an ongoing loss and won’t generate a passive income to help pay for the property’s holding costs. Another drawback is the potential for a capital loss. Investors get into real estate to make money, but there are no guarantees.

What is positive gearing?

On the flip side of negative gearing, positive gearing takes the opposite approach, whereby the income you earn from your investment property is higher than your expenses. This tactic is ideal for investors looking for consistent returns and a passive income. And if the property increases in value there will be capital gains on top of your rental income when you come to sell. You will pay tax on your rental income and with rising rates, it can be more challenging to find suitable properties which fit the strategy.

Neutral gearing explained

If your investment property costs you nothing, but also earns you nothing, then it is neutrally geared. Essentially, you’re breaking even with no advantage or disadvantage when it comes to paying tax. It’s a rare approach because it’s difficult to perfectly align both the expenses and earnings but can work well for anyone investing through a self-managed super as it won’t eat into the fund’s wealth.

How it works on both sides of the “gearing” fence

Taking the positive approach

Let’s take a look at Anna’s story. She’s worked hard to save a $170,000 deposit to buy an investment property and after finding the right place, put that cash down as a healthy 40% deposit towards the $425,000 cost.

Now tenanted, the property makes $2,000 in rent a month and the mortgage along with other expenses adds up to $1,000 a month. That’s $1,000 of positive monthly income, or $12,000 a year. This $12,000 income will be included as part of your total taxable income come tax time.

Negative gearing in action

Henry owns an apartment which is generating $20,000 a year in rent. Because he started out with a 15% deposit, he is highly geared with a large mortgage interest bill of $25,000 a year. Then there’s $4,000 in annual expenses, so overall his investment property is costing him $9,000 a year.

This loss can now go towards reducing his taxable income, and ultimately his tax bill at the end of the financial year.

Since he is taxed at 33%, offsetting the $9,000 against his taxable income drops the final ATO bill by $3,000. Now Henry’s out-of-pocket costs are only $6,000 which he feels comfortable taking on in the expectation he’ll make significant long-term capital growth.

What to consider when negative gearing

It’s important to cover all your bases when working out whether negative gearing is the right strategy for your personal circumstances and the property in question. Prepare yourself by asking;

• Can I realistically pay for the property while also losing money on it?
• If interest rates continue to rise, can I still afford this strategy?
• Is there scope to increase the rent to meet the mortgage demands?
• Is the property going to appeal to a high number of potential renters so it never sits empty?
• What happens if I can’t find a quality tenant, or even one at all?
• Has the home got good capital growth potential?
• When, if ever, will the property be positively geared?
• Will the potential tax benefit, coupled with the profit I hope to make upon its sale, outweigh the negative gearing loses?

Is negative gearing still worth it?

As the cost of living – and the price of holding a mortgage – continues to increase, negative gearing will eat more and more into your monthly expenses. While it can be a highly effective strategy to reduce your tax bill and unlock capital gains, there are a lot of other things to consider. If your household budget is already tight in the current climate, then perhaps this isn’t a path for you. However, if you have crunched the numbers and are confident you can absorb the extra costs then negative gearing might just be the right fit.

Ultimately, you’ll need to consider your own financial circumstances and speak to us to find a loan that suits your ideal strategy.

Suite 2, 1 Railway Crescent
Croydon, Victoria 3136

Email: integrityone@iplan.com.au

Telephone : 03 9723 0522

Integrity One Facebook

This information is of a general nature and does not take into consideration anyone’s individual circumstances or objectives. Financial Planning activities only are provided by Integrity One Planning Services Pty Ltd as a Corporate Authorised Representative No. 315000 of Integrity Financial Planners Pty Ltd ABN 71 069 537 855 AFSL 225051. Integrity One Planning Services Pty Ltd and Integrity One Accounting and Business Advisory Services Pty Ltd are not liable for any financial loss resulting from decisions made based on this information. Please consult your adviser, finance specialist, broker, and/or accountant before making decisions using this information.

Stay up to date with what’s happened in the Australian economy and markets over the past month.

The gloomy prospects for economic growth, both in Australia and overseas, are occupying the minds of investors, businesses and political leaders.

The early 2023 stock market rally appears to be fading as concerns about inflation and cash rate hikes are having an impact on investor sentiment.

Click here for our March update video.

Please get in touch on 03 9723 0522 if you’d like assistance with your personal financial situation.

Suite 2, 1 Railway Crescent
Croydon, Victoria 3136

Email: integrityone@iplan.com.au

Telephone : 03 9723 0522

Integrity One Facebook

This information is of a general nature and does not take into consideration anyone’s individual circumstances or objectives. Financial Planning activities only are provided by Integrity One Planning Services Pty Ltd as a Corporate Authorised Representative No. 315000 of Integrity Financial Planners Pty Ltd ABN 71 069 537 855 AFSL 225051. Integrity One Planning Services Pty Ltd and Integrity One Accounting and Business Advisory Services Pty Ltd are not liable for any financial loss resulting from decisions made based on this information. Please consult your adviser, finance specialist, broker, and/or accountant before making decisions using this information.

The year in property has begun with some stabilisation in values

Australian property values appeared to stabilise with a 0.1% increase in national dwelling values for February. There was a –2.3% drop over the quarter according to CoreLogic’s national Home Value Index (HVI).

Although median property prices are still falling across the country there are signs some wind has come out of the housing downturn’s sails. While the 0.1% dip continues into negative territory, the February statistic was an improvement on the -1% fall seen in January, and was the smallest month-on-month decline since June.

All in all, CoreLogic’s Index is –9.1% off its April peak, making this the largest and fastest decline in values since 1980 when their record-keeping began. However, it pays to put this dwelling downturn in context. “Record declines in home values follow a record upswing, both in magnitude and speed. The national HVI was up a stunning 28.6% in the space of just 19 months,” said CoreLogic research director Tim Lawless.

“Despite the recent sharp drop in values, every capital city and rest-of-state region is still recording home values above pre-pandemic levels.

All eyes on interest rates

While they aren’t the only driver of the downturn, interest rates have played a major role in steering the ship. Once the Reserve Bank decides to hit the pause button – which is largely tipped to be in the first half of 2023 – economic experts predict housing values are likely to stabilise. Mr Lawless said there may be a few month’s lag before declines actually flatten out, but for a growth phase to begin the market needs to see some form of stimulation. “The most obvious stimulus would come from a drop in interest rates, but any cut to the cash rate probably won’t occur until late this year at the earliest.”

At its first meeting for 2023, the RBA increased the cash rate yet again by 0.25 percentage points on February 7, for the ninth time in a row, pushing the cash rate to a decade-high of 3.35%.

Top end price performance

The upper quartile of the combined capital city housing market drove this month’s stabilising trend, increasing by 0.1% in February.

This trend was most obvious across Sydney’s upper quartile, which recorded a 0.7% rise in values over the month, compared with a -0.2% fall in values across the lower quartile of the Sydney market. Upper quartile housing values have led the downturn to date, dropping -13.5% in value across the combined capital cities over the past 12 months, compared with a 1.7% rise in values across the lower quartile. Previous cycles have seen a similar trend, where the upper quartile tends to lead both the upswing and the downturn.

Regions still in favour

After extraordinary price growth in 2021, values in all regions are declining. Regional dwelling values were down -0.3% in February compared with a -0.1% fall across the combined capital cities. However, the weaker regional result relative to the combined capitals was mostly a factor of the monthly rise in Sydney housing values rather than a larger fall in regional market values.

Overall, CoreLogic recorded a combined regional market fall of -2.1% for the quarter to February 28. That’s a modest movement backwards after the combined non-capital city areas saw housing values surge 41.6% through the most recent upswing. Since peaking in June, the combined regionals index is only down -7.7%.

Melbourne

Melbourne’s median dwelling value is down –2.7% over the quarter. Data shows the Victorian capital has had a Covid trough to peak of 17.3%. After peaking in February 2022, the median dropped by -9.6%. Regionally, Victoria is –7.0% off its most recent peak in May 2022.

Sydney

The quarter to January’s close saw the median dwelling price in the Harbour City fall by –2.4%. Although In February Sydney was the only capital city to record an increase, gaining 0.3%. Sydney’s median peaked in January 2022 and has since experienced a -13.5% decline. The city’s trough to peak was 27.7%. After hitting its peak in May 2022, regional NSW closed the most recent quarter –10.1% off that high.

Brisbane

By February Brisbane’s median dwelling price was down –3.2% for the quarter. The capital of the Sunshine State had an exceptional trough to peak throughout the pandemic with the media skyrocketing 42.7%. Post peak in June 2022, the drop has been –11.0%. Across regional Queensland the median has come -7.3% off the June 2022 high.

Canberra

The ACT experienced a –2.7% decline of its median dwelling price during the three months to February’s end. Australia’s capital reached its price peak in June 2022 and has since come off the boil by –9.0%.

Perth

The Perth median appears to be plateauing with a modest quarterly move of just -0.2%. According to CoreLogic data the West Australian capital’s market only reached its peak in July 2022 and has come off just -0.9% since. The full trough to peak figure for Perth has been 25.9%. Regionally, the state is reportedly at its peak after experiencing a 32.4% increase through the recent growth phase.

Note: all figures in the city snapshots are sourced from: CoreLogic’s national Home Value Index (March 2023)

If you have any questions or need any information please give us a call on 039723 0522.

Suite 2, 1 Railway Crescent
Croydon, Victoria 3136

Telephone : 03 9723 0522

Email: integrityone@iplan.com.au

Integrity One Facebook