How the election could influence your investments

The election is now only a week and a half away and we thought that would be a good time to go through how the election could potentially impact your investments. The trap is to fall into thinking that your vote doesn’t count and you are only one of the 16,424,248 Australian’s who are registered to vote (https://www.aec.gov.au/Enrolling_to_vote/Enrolment_stats/index.htm). Every vote does count and like other elections the outcome of who gets elected will impact your personal finances and investments, so make sure you are taking this into account when casting your vote on Saturday 18 May 2019 (unless you are one of eager bunch who have arranged a postal vote or gone to an early voting centre).
 
 
We’re going to take a look at what we believe are the five biggest potential changes proposed and what these proposed policies could mean for you and your investments. Of course it’s important to note that these are only proposed policies and could look quite different by the time they are put through parliament and accepted as law so it’s important to not jump and make any rash decisions.
 
 
Proposed policy change #1 – Negative Gearing
 
 
Under a Shorten Labor Government negative gearing will be limited to new housing from 1st of January 2020. All investments made prior to this date will not be affected by the changes and will be fully grandfathered. The idea behind this is to improve housing affordability and support housing construction. The Coalition plans to make no changes in regards to negative gearing and will continue on with business as usual.
 
 
These proposed changes could potentially mean a decrease in the demand for investment properties as people will no longer be able to use the offsets as a deduction against their personal tax. This seems to be the motivation behind the policy as stated on the Labor website that they are looking to improve housing affordability so it could be good for those of you looking to get into the market and potentially purchase a first home. There may also potentially be an increase in property demand between the election date and the 1st of January 2020 if Labor get in as people may rush to purchase investment properties now so it is grandfathered and they are able to negatively gear. Businesses involved in the production of new homes may also potentially gain from this policy as Labor are hoping it will push people to purchase newly built properties.
 
 
People who have a large portion of their wealth sitting in property could potentially be adversely affected by falling property prices along with people who were potentially planning to buy a property in the short to medium term and may now miss out on the potential tax deductions associated with negative gearing. Renters may also be affected as landlords may look to bump up the rent when the ability to deduct the losses from your personal tax is gone and therefore less viable for the landlord. 
 
 
 
Proposed policy change #2 – Franking Credits
 
 
Franking Credits, also known as Imputation Credits, are a type of tax credit that allows Australian companies to pass on tax paid at the company level to shareholders. The benefits are these franking credits can be used to reduce income tax paid on dividends or potentially be received as a tax refund. Under Labor’s proposed policy franking credits can only be used to reduce tax but you will no longer get a refund for excess franking credits. This policy does not apply to recipients of an Australian Government pension or allowance. Self-managed Superannuation Funds with at least one recipient of an Australian Government pension or allowance will also be exempt from the changes however you needed to have that person in your fund from the 28th of March 2018, so you can’t rush to find someone on a pension now to put in your SMSF as it is too late. ATO endorsed income tax-exempt charities and not-for-profit institutions with deductible gift recipient status. 
 
 
There are not really any potential winners from this change other than where the additional revenue that is saved will be funnelled too. Self funded retirees and people on lower income tax rates below 30% or paying no tax could be negatively effected. Other possible ramifications of a policy like this could be a selling down of Australian shares that pay a fully franked dividend as investors may no longer see the same amount of value there and look at other investment options.
 
 
 
Proposed Policy change #3 – Income Tax
 
 
Labor will support the increase to the low and middle income tax offset proposed in the budget by the Coalition and will deliver tax relief from 1 July this year. The difference between the two is that Labors policies will generally support lower income workers more whilst they will hurt higher income earners with their proposed temporary budget repair levy which means taxpayers earning $180,000 and over will pay an extra 2 % in tax. Labor have made it clear that they feel tax cuts to those earning over $180,000 are not justified. 
 
 
 
These tax policies mean that low to middle income earners will have tax cuts meaning more money in their pocket as the table above shows. Low income earners will potentially be better off under a Labor government as they are looking to give them more of a tax cut. High income earners will potentially be worse off under a labor government as they will have to pay an extra 2% in tax for money they earn over $180,000. 
 
 
 
Proposed Policy #4 – Capital Gains Tax
 
 
Labors proposed policy is to halve the capital gains tax discount for all assets purchased after 1 January 2020. his will reduce the capital gains tax discount from assets held longer than 12 months from 50 per cent to 25 per cent. All investments made prior to the 1 January 2020 will be fully grandfathered. The Coalition plans to make no changes to the way capital gains tax works. 
 
 
What this ultimately means is that when investors are to sell an asset that they purchased after the 1st of January 2020 and they have held it for more than 12 months they will be paying an extra 25% in tax than under the current rules. When you’re talking about assets as big as a property this could be a considerable hit. We may see a rush of purchasing before the 1st of January 2020 for both shares and property for people to get in before they lose this benefit if Labor were to form Government. Talking to your tax adviser to see what is the best way to go about the sale of an asset is always a good idea and it may be a better idea to hold off until you have less taxable income (retirement, for example) to not have to pay more in tax. 
 
 
 
Proposed Policy #5 – Discretionary Trusts
 
 
Under Labor’s proposed measure, from 1 July 2019, all discretionary trusts (often referred to as a family trust) will be subject to a minimum income tax rate of 30% for discretionary trust distributions to beneficiaries over the age of 18, despite the income tax benefit of the beneficiary. This will not apply to:
  • Special disability trusts
  • testamentary trusts
  • fixed trusts
  • cash management unit trusts
  • fixed unit trusts
  • public unit trusts
 
 
The Coalition plans to make no changes to the way discretionary trusts are taxed.
 
 
The measure is expected to impact around half of the 642,000 discretionary trusts in Australia today that hold over $590bn in assets. This has the potential to impact small business owners who are currently distributing income through a discretionary trust, it will also effect families who are splitting income from one main income earner to other family members aged over 18 who are on low incomes. This may result in people potentially looking at different ownership structures however selling these investments and changing the ownership could trigger capital gains tax consequences for people. As always it’s important to speak to your advisers, like accountants, to see what is the best structure for you. 
 
 
 
As we discussed at the start, these policies are proposals only and depending on the outcome of the election and what our government looks like these policies could look very different when passed through the Parliament as law. As always, if you have any questions feel free to email them through to connect@pekada.com.au or give us a call on 1300 735 232. Enjoy the sausage sizzle!
 

                        

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Post Contributor:

Zac Masters | Financial Planner @ Pekada

Wealth Collective trading as Pekada (ABN 95 624 612 684), corporate authorised representative (CAR), number 1263725, is authorised to provide financial services on behalf of Communitas Wealth Pty Ltd.

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