Labor Government Tax Policy - More than just Franking
With a Federal election expected to be called by the sitting Government in May 2019, Labor is the clear favourite to become the next sworn in Government. Labor have been vocal recently by stating that their main objective is to reduce the fiscal debt by introducing new proposed tax reforms.
So, what are the risks and implications for investors both inside and outside of superannuation across the different asset classes?
The imputation system, which avoids dividend income being taxed twice, will stay in place, Labor is looking to abolish the refund of excess franking credits. The only way you can have an excess franking credit is to have a low income. Therefore, the only possible targets are low income earners, and superannuation funds, where the tax rate varies between zero and 15 per cent.
Investors will look to replace those shares that pay a fully franked dividend with those that display more growth in their capital via a higher stock price (overseas stocks?) or allocate funds to those shares that earn revenue offshore and pay a higher unfranked dividend.
Superannuation - Will this lead to clients closing their SMSF?
Those with a Self-Managed Super Fund (SMSF) who are at risk of losing their franking credit refunds may look to close their SMSF and invest in a retail super fund who can distribute the excess franking credits within the fund.
Alternatively, one can invest in higher earning assets classes to compensate for their lost income returns. This may mean increased allocation to international equities or property.
The ALP has proposed to limit negative gearing to new rental dwellings and to halve the CGT tax discount from the current 50% to 25%.
The unintended consequences of this policy are twofold, firstly vendors will be less likely to sell assets that will occur substantial CGT, which in turn removes liquidity from the market which could force prices up. Added to this will be the implications of less transactions which means less Stamp Duty for State and Territory Governments.
The second larger issue is that investors will be driven to buy new properties, both apartments (which will generally be in the CBD) and houses (which are likely to be in the outer suburbs).
So, investors who are going to chase tax benefits will lose out in two ways: poorly located properties and ones that will have a reduced capital growth rate, which in turn reduces the wealth of the investor and removes the capital expenditure that the household would normally deploy into the economy. .
Labor needs to be careful that it isn’t trying to fix one problem (budget) by creating an even greater one.
Please contact your Bennett & Co Private Wealth adviser if you would like to understand how these changes could impact you or if you would like to learn more about our own superannuation product.