“You might not be interested in politics”, goes the famous quote. “But politics is interested in you.” What’s more at the upcoming election, politics is particularly interested in high net worth investors.
The next Federal election must be called before May 2019. Reading through the promises already in the media marketplace it’s an election that could have big implications for High Net Worth (HNW) investors. In this article we look at some of those proposed policies and at some implications for HNW investors and their families.
Before we do that, we need to make the following points:
- Most of the policies discussed below are proposals only – they have not been tested at the ballot box, or legislated, passed by either house of Parliament or received Royal Assent
- Perpetual’s Strategic Advice team believe some of these policies could have major impacts on HNW investors. Yet they believe no-one should be reacting to proposed policies
- That said, it’s useful for investors to understand potential changes to the investment landscape. Please call your adviser if you’d like to discuss any of the issues raised in this article.
What’s on the table?
The Labor Opposition has proposed major changes to the law around the refunding of franking credits to those not paying tax (a policy in place since 2002). While Labor has recently reviewed its position to more closely target wealthier investors, many believe it will have wide ranging effects on self-funded retirees (those not receiving even a part-pension from the Government).
The SMSF Association has estimated the policy change could affect one million Australians. This policy proposal is now the subject of an inquiry by the House of Representatives Standing Committee on Economics.
Half the discount
Currently (and in broad terms), the gain on a sale of shares, managed funds or an investment property held for more than a year are taxed at your marginal rate but with the tax discounted at 50%.
Labor proposes a change to the CGT discount – halving it to 25%. This will affect investors by effectively raising the tax on capital gains.
The longer run implications of this policy are also under scrutiny. Those currently owning property are theoretically grandfathered (protected from the impact of the tax change). However, when they come to sell their property, they will be selling into a market where the tax treatment of a property sale is half as attractive as it once was. This may affect demand – and therefore prices.
A negative positive?
As Labor has also promised to limit negative gearing to new investment properties (albeit with more grandfathering) the policy mix is a controversial one. While many argue it is a major imposition on property investors and could exacerbate a falling property market, others think it will improve housing affordability.
The sound of loopholes closing
Bill Shorten issued a media release on 30 July 2017 that a Shorten Labor Government is also committed to reducing ‘loopholes which allow some wealthier people to minimise their tax’. This may involve taxing discretionary trust distributions to beneficiaries over the age of 18 at a tax rate of 30%. While trusts are used for various purposes, including estate planning and asset protection, Labor’s current position would limit how HNWs, their families and businesses use family trusts as part of their overall strategy.
You’re not home - but the Capital Gains Tax is
It’s important to note that all the tax policies affecting HNW families are not proposed by the Opposition. The Liberal Government is currently pushing a major change to the capital gains tax treatment of the main residence for expatriate Australians – effectively ending the capital gains tax exemption. This proposal is proving to be controversial. If enacted in its currently proposed form, such a policy would provide a significant disincentive for Australian executives to take on an overseas assignment.
There are also tax polices affecting HNWs that have enjoyed a spell of bi-partisanship. Most recently both parties effectively agreed to cutting the tax rate on companies with turnover lower than $50 million down to 25% (from 2012-22). This compares with the current company tax rate of 30%.
Watch this space
As mentioned above, many of these changes will be political battlefields in the election due for early next year. There will be compromises, conditions and consultation before they even become concrete policy proposals and even more shifts as they work their way through Parliament (if they ever get there).
The important thing to note is that investment and tax regulation does change and that sometimes investment and tax strategies need to change with them.
That’s where your Perpetual adviser can help. They can help you navigate the regulatory maze, so that you stay informed and aware of how any pending legislative change may affect your strategy. This means you can respond to changes that may affect you without the anxiety of constantly worrying about media noise.
Financial plans need to be strategic but also flexible. Your adviser can help you stick to an over-arching strategy, but also help to tailor a change of approach if it’s needed.
DO YOU HAVE THE RIGHT INVESTMENT AND TAX STRATEGY?
Crafting an effective investment and tax strategy doesn’t have to be daunting. It starts with a simple conversation about your current circumstances and future goals. Perpetual’s expert financial advisers can then build an investment and tax strategy calibrated to your unique needs.