The Federal Government election is near, and further details are being provided as to what changes each party is proposing.
Labor is a firm favourite to win ($1.25 in markets) compared to the Coalition ($4 outsider).
Given the strong favouritism, and significant changes proposed by Labor for Superannuation and Tax systems, it’s worthwhile reviewing how they may impact us all in the year ahead should it be passed as legislation.
This quote from the PriceWaterhouseCoopers Chief Economist sums it this up this way,
“There’s a clear philosophical difference between the two parties and I think that is a difference to previous elections,”
“One party is really saying that they don’t want to see tax rises, they’ll be prudent and fiscally restrained, and the other party is quite clear in saying they to raise taxes so they can spend more on their priorities.”
Labor – Those earning less than $40,000 may receive up to a 30 per cent higher tax offset than the Coalition.
Generally similar policies, with a tax offset applicable in 2019.
In the future however, the Coalition wants to flatten tax brackets and reduce the marginal tax rate by 2024.
The two stage plan would mean that anyone earning between $50,000 and $200,000 would pay the same rate of tax.
Labor opposes these more fundamental changes to the income-tax system.
Whilst no immediate changes are announced, the Coalition over the long term with a flattened tax bracket would benefit high income earners.
Removing the top tax bracket entirely meaning those earning between $120,000 and $200,000 would have their tax rate reduced from 37 per cent to 30 per cent.
As highly publicised, Labor will scrap negative gearing on property investments bought after January 1, 2020.
This means investors will not be able to claim a tax deduction where rental income losses occur against other taxable income (eg. salary).
Existing negatively geared properties and newly built properties will be exempt.
Whilst first home buyers could find this beneficial as less demand is a likely outcome, there are concerns, given the recent trend down in property markets in Sydney and Melbourne, that it will could exascerbate price falls and increase rents.
A lot of publicity has centred upon Franking Credits, and the status of them being refundable for those shareholders that are on a tax bracket lower than 30% (ie. the company tax rate).
The Liberals plan to maintain the dividend imputation system. The intent is designed to stop shareholders from paying double tax on company profits.
Labor intend to scrap the refundable franking credit system. Whilst the franking credits can be ‘used’ and absorbed for individuals or superannuation funds, where the tax payable or rate is lower then no cash refund will be payable from the tax office.
My personal view is that the system has not been well understood nor communicated by politicians to the public. This is the most disappointing aspect as it’s a decision that will impact not only share investors, but also the large businesses that drive the Australian economy.
When sweeping changes such as these occur, it is my experience that we witness unintended consequences. A flight of capital can occur from what asset class, and money flows to alternative opportunities.
This is a risk for Australian companies that have historically provided solid, reliable dividends to investors over many decades.
We will continue to monitor how this may affect investment options in the future pending the outcome of the election and future legislative changes.
There are stark differences when it comes to financial policies with Labor or Liberal in this election.
A more detailed explanation is available in this article, as there other changes touched upon including the cessation of Catch-Up Contributions into superannuation, etc that have the potential to impact retirement saving strategies.
If there is a particular subject or policy that you are not sure of, and would like to know more about – and how it may potentially affect you, by all means shoot me an email and I’ll be in touch with information.