Implications of Labor’s Proposed Policies: Property, Investment Property, Franking Credits and Other Issues – Part 1

November 2018 | General

With the current turmoil in political circles, we thought it timely to provide some commentary on the policies announced by Labor, as Parliament is sitting at the end of this month. Somewhere between May and November 2019, we will see another Federal Election. While the policies of both parties are varied and complex, of particular interest to us and our clients are the Labor policies, as they are the most complex and likely to have the biggest financial impact on the country.

The policies Labor announced are detailed, so we are sending a series of articles which try to help you understand the impact of some of these policies on your financial and tax positions in the event that Labor win the next election.

We apologise to clients in advance for getting more emails from us, as we do not wish to spam you, but there is a lot happening in financial circles currently, and most clients want us to help, giving you an idea of what the financial and tax landscape looks like will assist you to make decisions about your future.

While we do not support any particular political party, and do not wish to take political sides, the recent announcements by Labor will affect a number of our clients. Although the announcements by Labor are designed to tax the rich and then give to the poor by way of Government Benefits, Health, Hospitals and Education, they will have bigger impacts and ramifications for the country. Many clients may think that they won’t be affected, but it will affect all clients who:

  • Own their own home;
  • Own residential properties, so have negative gearing or tax structures to maximise their tax positions;
  • Have superannuation funds that own shares which have franking credits;
  • Have investment portfolios that own shares which have franking credits;
  • Own shares that they bought in the float of Comm Bank, AMP, Telstra, and others; and
  • May be receiving Government Benefits, such as the Health Care Card, Aged Pension, Aged Care or other benefit.

This first article in our series, is around the announcements for:

  • Negative Gearing on Property; and
  • Capital Gains Tax discount, and its affect on property.

We will send further updates relating to:

  • Franking Credits;
  • Negative Gearing relating to investments in shares and margin loans; and
  • General policy announcements.

After another round of musical chairs in Canberra, Scott Morrison became our new Prime Minister. This leadership spill was largely due to the belief that Labor is likely to win the next Federal Election. With a Labor victory a strong possibility, if the bookies are right, clients should understand the potential impact on their tax, financial and investment position.

The Reach of the Policies

Before we delve into the two major policy announcements, we will give some context to the reach of the policies.

Here are some statistics, so don’t think that this won’t happen to you or won’t affect you:

  • From the 2016 Census, an estimated 31% of Australians own their own home with no mortgage;
  • From the 2016 Census, an estimated 34.5% of Australians are paying off a property with a mortgage;
  • This is a total of 65.5% of Australian households own property;
  • 30% of Australians rent; and
  • It is estimated that 21% of households own a second home that would count as an investment property.

You can see that these proposed changes to the Australian Property market are likely to affect more than half of all Australian families.

Banning Negative Gearing

Currently, where any borrowings are used to support the purchase of shares or property and, where the income is less than the expenses, a tax deduction may be claimed. A Labor Government at the next election will see this abolished.

The policy proposal will ban negative gearing on new share and property investments unless it’s a ‘new build’ for property, from a date yet to be decided after the next election.

The policy is designed to raise more tax, and to reduce the demand for housing by investors, in order to promote more home ownership.

Reducing Capital Gains Discount

Labor propose to halve the capital gains discount for all assets purchased after a yet-to-be-determined date after the next election. Currently, assets held for more than 12 months benefit from a 50% capital gains discount. Under the Labor proposal this discount will only be 25%.

They propose grandfathering investments held prior to whatever date this comes in, and also protecting superannuation funds from these changes.

How will this affect Property Markets?

Both changes are designed to make property significantly less attractive to potential investors as the cost of owning an investment property would increase, and the tax effectiveness will reduce. When both policies are taken into account, the fear is that waning investor interest would lead to a drop in the value of the housing market.

The greatest impact will be on already weakening property prices.

The WA property market is also now suffering. Earlier this year, the WA property market was showing signs of improvement. However, in the last few months, the flicker of hope of a property resurgence has slowed. While rental markets are starting to improve in WA (with the rental vacancy rate below 6% for the first time in a number of years), this hasn’t flowed through to the property sales market. While there is a lot of activity in WA in the resource sector (mining and oil & gas), a lot of the growth and activity hasn’t flowed through to the WA economy. Some of this is due to a change in migration rules to allow for more people to come into the country to fill the void in engineering, project management, and other technical assistance. There have been more people leaving WA than coming to WA, which has meant lower demand for property. The WA economy needs more foresight into the future to assist in promoting demand for housing, and to then help with the property market push.

The Melbourne and Sydney property markets are already experiencing drops of around 10% to 20%, and that is without these policy announcements.

With the Labor policy announcement, it is likely that the WA property market will again fall, as the demand will be further reduced, as well as property prices across the nation. A report published jointly by RiskWise and Wargent Advisory, has estimated projected price reductions nationally between 6% and 10%. In WA, the worst affected state so far, that’s another estimated fall of 6% – 10% in the value of your family home.

As they say things come in 3’s, and unfortunately for property investors, if the Labor policy gets up by way of election, we could have the perfect storm of:

  • Property declines already due to current economic conditions;
  • Labor Government adopting the changes; and
  • An interest rate rise, which could also be on the cards.

What else could be announced?

If Labor win, there could be additional policies that they may introduce. The once sacred Family Home which is exempt from Capital Gains Tax could be in the sights of Labor as a way to raise more revenue in order to deliver on their policy commitments. While we are supportive of providing a better country for all, the great Australian dream of owning your own home and then being able to live comfortably in retirement without a landlord, and no support from the Government, could be dashed if those policies become law.

In conclusion

The best chance to stop this is before the next election. If the number of disenchanted voters swells, there’s a possibility that these changes will be wound back or scrapped altogether.

You can get in touch with your local member of parliament and make your voice heard. What have you got to lose? The one thing that politicians like more than free travel, is being re-elected.

If you have any further enquiries, please don’t hesitate to contact us on (08) 9227 6300 or clientservices@austasiagroup.com

Important information and disclaimer

This publication has been prepared by AustAsia Financial Planning Pty Ltd AFSL 229454, AustAsia Accounting Services Pty Ltd Registered Tax Agent No 7587 3005 and AustAsia Finance Brokers Pty Ltd, Australian Credit Licence No 385068.

Any advice in this publication is of a general nature only and has not been tailored to your personal circumstances. Accordingly, reliance should not be placed on the information contained in this document as the basis for making any financial investment, insurance or other decision. Please seek personal advice prior to acting on this information.

Information in this publication is accurate as at the date of writing, 7 November 2018. In some cases the information has been provided to us by third parties. While it is believed the information is accurate and reliable, the accuracy of that information is not guaranteed in any way.

Opinions constitute our judgement at the time of issue and are subject to change. Neither the Licensee nor any member of AustAsia Group, nor their employees or directors give any warranty of accuracy, not accept any responsibility for errors or omissions in this document.

Any general tax information provided in this publication is intended as a guide only and is based on our general understanding of taxation laws. It is not intended to be a substitute for specialised taxation advice or an assessment of your liabilities, obligations or claim entitlements that arise, or could arise, under taxation law, and we recommend you consult with a registered tax agent.

 

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