A Change of Government?

The Australian Federal election is fast approaching and if you believe the news poll, there is a high probability that we could see a change of Government, with Bill Shorten likely to become our 31^st Prime Minister.

It is uncommon for us to delve too much into Government policies before the annual budget in May, and we are in no way suggesting how you should vote. However, the ALP has announced policies that could have a direct impact on some investors, especially self-funded retirees.

Below, we highlight some of these potential policy changes and how it may affect clients.

Negative gearing

Proposed ALP policy – “Limit negative gearing to new housing from a yet-to-be-determined date after the next election. All investments made before this date will not be affected and will be fully grandfathered.”

Grandfathering investors with existing properties will somewhat protect them so the main implications will be whether or not the housing market declines further due to the disincentive set for new investors. While the impact is hard to quantify, it could set a new round of declines should Labor win. We are already hearing many large developers not taking on any new projects once their current ones are completed sometime over the next 12 months. With rents being pressured over the past couple of years due to the abundant supply, one positive could be a mean reversion of rental yields should market prices fall and demand and supply normalise.

With assets such as shares, interest deductions will still apply but income needs to fully offset allowable deductions. Any extra losses are unlikely to be claimable. If we continue to experience downward pressure on house prices and construction, listed companies with large construction and development exposure along with some retailers could see continuous pressure.

Franking Credits

Proposed ALP policy – “From 1 July 2019, the ALP will cease cash refunds of excess franking credits.”

Clients that are already paying a marginal tax rate of 30% or higher will have no impact by the proposal, if the tax change gets passed through in the Senate and becomes legislated. We think there will be fierce debates around this but nevertheless, it is prudent to be ready.

The biggest hit will be to investors who pay zero or low levels of tax such as those in pension phase, non-working spouses who hold shares and also those with excess franking credits and are currently receiving refunds.

With this potential impact, there is an incentive for some companies to pass their accumulated franking credits to shareholders before this value is taken away from them.

As outlined, this proposal still needs to pass through the Senate before it can be legislated and it could make for some interesting debates.

Capital Gains Tax discount

Proposed ALP policy – “Halving the capital gains tax discount from 50% to 25% where the assets have been held by more than 12 months.”

In the longer term, this tax change could be more significant than any of the above proposals as it affects the general working population and the Australian economy. This change is effectively a tax increase on investments and can be seen as a net negative on investments and our country’s growth. It will apply to all investments such as shares, property, managed funds and even collectables.

Like the proposal on negative gearing, the ALP has mentioned that the tax change will not be made retrospectively. Therefore, all investments made before the yet-to-be announced effective date, will not be caught under this change.

The other piece of good news is that super funds won’t be impacted, so there will be no impact on the current discount of one-third that applies to investment owned by a super fund.

The important point to note is that none of the above proposals are guaranteed to be implemented even if Labor wins the Federal election in May. However, we encourage clients to discuss the above or any financial matters you may have with your advisers to see if any preparation and adjustments need to be made to your overall strategy should the above be legislated in some form or another.