Noel Whittaker writes exclusive weekly blog updates for the Ban Tacs Group, with IN8 Business Advisory a member of that group. Here, he talks about his take on the 2021 Federal Budget.
A welcome feature was the commitment to gradually raise compulsory superannuation to 12% — because this is often the only way poorer citizens can have a decent retirement. However, I just don’t get the hype about rules being relaxed to enable people over age 60 to downsize and contribute up to $300,000 each into superannuation from the sale of the house.
Think about it. The work test is being abolished from July next year, except for persons aged 67 to 74 who want to make personal deductible super contributions. This means most people will be able to contribute to super in some shape or form up to age 75, whether they are working or not. The only limitation is that once you have $1.7 million in super you cannot make any more non-concessional contributions apart from the downsizer special contribution. But the average retiring couple would be pushed to have $800,000 in super between them, so they could already both contribute $330,000 using the normal contribution rules. They don’t need to access the downsizing contribution. The only winners from the new rules will be the wealthy, who have more than $1.7 million in super now.
But a bigger issue facing Australia is the thinking by both major political parties that “something must be done” to make housing more affordable. Yes, right now we are in the middle of an extraordinary residential real estate boom, but this has been caused by our Reserve Bank cutting rates to historic lows. Low rates increase the number of people who can qualify for a housing loan, and at the same time turbo charges their loan potential. The rush started as soon as mortgage repayments became cheaper than rent, and of course, once a rush starts, everybody wants to jump on the bandwagon for fear of missing out. And so it goes on and on.
Every government initiative to help first home buyers simply increases the number of buyers in the market fighting over a rapidly declining amount of residential housing stock. This feeds the vicious cycle of prices going up.
Let’s face it, any asset is only worth what somebody is prepared to pay for it, and how much they are prepared to pay is governed by how much they can borrow.
This budget has also further increased the number of people who are eligible for a housing loan by enabling them to take part in the First Home Loan Deposit Scheme — which is really a lottery allowing them to buy a home on a minimal deposit. This was a disaster in Great Britain and may well become a disaster here. The interest rate cycle around the world is turning upwards, and at some stage homebuyers will face an increase in their mortgage repayments. This will put many under financial pressure, which may well cause a downturn in the housing market.
The government also announced that more money can be saved in the superannuation system for a deposit on the first home. I’ll cover this in detail next week, but basically first home buyers can make additional personal contributions of up to $15,000 a year as a tax deduction, and then withdraw the money when needed to buy their first home. The only good thing about it is the guaranteed 3% earning rate while the money is in super. The sting is that the contribution loses 15% going in and is taxed at marginal rates less a 30% rebate on the way out. It’s of small benefit to most first home buyers, especially when one considers the huge amount of paperwork involved to take part in it.
16 May 2021
