Financial Planning
Advice firm runs rule over Labor policy

A prominent financial advice group suggests Labor's proposals on negative gearing, capital gains tax and dividend imputation all need a closer look heading into an election year.

HLB Mann Judd Sydney wealth partner Jonathan Philpot said these issues are likely to dominate investor discussions throughout 2019 and the impact must be examined.

On negative gearing, Philpot said Labor has committed to abolishing negative gearing on existing residential property. Negative gearing on new property developments will continue.

"With the property market already going through difficult issues with the banks tightening on lending, limited access to interest only loans, and a general downturn in the property market, many potential investors are probably already on the sidelines," Philpot said.

"Over the longer term, if less rental property becomes available over time, we would expect to see rental yields increase, possibly even to the point where they start to become positively geared."

A separate issue is the measures people will then consider in reducing their personal taxable income.

"Personal super contributions of the difference between the $25,000 maximum limit and the compulsory SG contributions may provide a large tax deduction," he said.

"Particularly for those over age 40, contributing more into superannuation for the primary reason of a tax deduction may be a sufficient incentive to lock money away until retirement."

On capital gains tax, Labor's proposal to halve the CGT discount from 50% to 25% on all investments after a specified date, may lead to a surge of investment, particularly into the share market prior to the change.

"Unlike property, share investing is generally positively geared with the ASX dividend yield vplus franking credits about 5.5%, which is higher than most borrowing costs," Philpot said.

"For long term investors, moving cash into shares before these changes commence will lock in the significant tax advantages of capital gains being a 50% discount to taxable income.

"Over the longer term, while the advantage will be diminished, growth assets will still provide some tax advantages over income assets - such as term deposit and bonds - with the reduced discount of 25%."

He says investment ownership structures will become even more important with increased personal tax rates.

"If all beneficiaries are in the highest tax bracket, an investment company may be the most tax effective structure to invest long term wealth. The capital gains tax rate is not discounted, but the 30% tax rate is now lower than the 25% discount to the top marginal tax rate plus Medicare levy of 35.25%," he added.

On the potential loss of franking credit tax refunds, Philpot said this measure disadvantages those that currently fall just outside the Age Pension assets limit of $848,000 for a couple that own a home.

"Over the longer term, while these changes decrease the attractiveness of Australian shares, they remain a better income solution than international shares and, with the current low interest rates, than term deposits and other fixed interest investments," he said.

"It is difficult to see companies changing their shareholder offers such as share buybacks, given the large super funds are bigger shareholders than SMSFs; however in the future, whether an individual or a SMSF participates in the offer would depend on whether they will benefit from the franking credits."

Read more: Laborfinancial adviceJonathan PhilpotAge PensionASXCGTHLB Mann JuddMedicare
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