Labor’s negative gearing & tax concession policies – how will they affect investments & what can you do?

Your choice could affect you more than you think.

With the recent announcement of the federal election  and, with the odds of a Bill victory “shortening” more than the odds were for Winx winning her final race, it’s time to look at the implications for investors and taxpayers under a Labor government.

For instance, what will happen to negative gearing under Labor? What impact will the removal of tax concessions have on investments?

Here we examine the key policy announcements by Labor and their potential impact on investors and SMSF fund members.

We also offer some potential strategies to reduce the negative impact for existing or would-be investors.

Key policy announcements by Labor

Labor’s key policy announcements include:

  • Removal of the tax concessions from negative gearing for investors purchasing certain property (including shares);
  • Halving the discount applying to capital gains made from the sale of assets owned for 12 months or more (from 50 percent to 25 percent);
  • Limiting the tax offsets available in relation to imputation credits from dividends received from investments in Australian companies: the tax offset will no longer be refundable.

Labor’s negative gearing, CGT & tax proposed offset changes: Who’s affected?

Negative gearing under Labor is set for significant change. The removal of tax concessions from negative gearing will apply to all taxpayers to any investments made into property or shares that are not “new” and are bought after 31 December 2019.

Additionally, the reduction in the capital gains tax (CGT) discount will apply to all taxpayers in relation to any assets bought after 31 December 2019.

The changes to the tax offset for dividend imputation credits will also affect all taxpayers other than those in receipt of a government pension or allowance (as at 28 March 2018) and will apply to any dividends received from 1 July 2019. Where at least one member of an SMSF is in receipt of a government pension or allowance (as at 28 March 2018), the SMSF will be eligible for a refund of all dividend imputation credits.

What’s the potential impact on investment values?

In the short term, the value of second-hand property may increase. Investors may scramble to take advantage of the fact that the changes to negative gearing only apply to second-hand property purchased from 1 January 2020.

The value of second-hand property may drop over time as a result of investors allocating more funds into new properties that continue to benefit from the current taxation concessions.

There is a counter-intuitive argument that investors may be less inclined to purchase new property if it is more expensive than second-hand property. This is because new property purchased automatically becomes second-hand from a resale perspective.

In other words, as the next purchaser will not receive the benefits associated with negative gearing and depreciation, they may be inclined to pay a lower price at that time for the now second-hand property than they would pay for a new property at the same time.

Finally, the value of shares for companies paying high-yielding franked dividends may reduce over time. Investors, whose previous strategy was to take advantage of the refundable dividend imputation tax offsets, may sell down these shares in favour of alternative investments.

What can you do as the election approaches?

Here are some ideas for what you can do between now and the election date:

  • Inform everyone you know about the potential financial impact of voting Labor;
  • Wait and see who wins the election before making any radical changes to your current plans;

If Labour wins;

  • If you are thinking about negative gearing into property or shares, do it after the federal election and before 31 December;
  • If you have cash reserves you wish to invest in appreciating assets, do this by 31 December;
  • Look for potential bargains for buying shares in companies that are currently paying high-yielding franked dividends;

If you’re a member of an SMSF;

  • Consider reinvesting part of your benefit in an industry fund that is able to pass on the benefits of the dividend franking credits to members in pension phase;
  • Obtain professional advice regarding your investment strategy to take into account the effect of the changes.

The bookmakers have Labor priced at $1.40 (drifting out from $1.15) to be the next sworn-in government.

This means that, unless there is evidence of Bill providing a character reference for George Pell (and surely no one in their right mind would consider that…. other than Tony Abbott or John Howard), they are a shoe-in to replace the coalition on May 18.

There is limited time to take action before the proposed changes become law so NOW is the time to start thinking about what this may mean to you and your financial future.

Put yourself in a position to hit the deck running when the dust settles after the election.

Please contact us if you need some advice specific to your unique situation

Disclaimer: Please note the comments made within this post are informational only and do not constitute advice. We recommend you do not act on any of the potential strategies without seeking professional advice from an appropriately qualified professional.

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