VETERINARY NEWSLETTER

February 2019

The Impact of Labor's Taxation Policies

The Late Senator Walsh
If only we had a Finance Minister or Treasurer on either side of politics of the stature of the late Senator Peter Walsh, who was the Finance Minister in the Hawke/Keating government during the only years in which that government produced an actual budget surplus. He was a tough old farmer from Western Australia, who used to denounce requests for government expenditure on unworthy causes in rough language. One of his kindest descriptions being ‘rent-seeking bludgers’. ‘Rent-seeking’ is an economic term for an unearned income stream. As a result of Walsh’s tough approach, the Australian budget got into good order. Either side of politics could well do with someone of his strength of character. At the end of the parliamentary sitting, he flew home to his farm in Western Australia, hopped on his tractor and plowed the fields. He got dirt under his fingernails and understood clearly where money came from and was therefore tough on unjustified spending proposals. Unlike much of the pork barrel approach of the Rudd, Gillard, Abbot and Turnbull governments.

The Impact of Labor’s Taxation Policies
With a Federal election looming, there is so much information in the financial press but it is evident that many of the journalists writing on the subjects are either:-

• Too incompetent to understand the basics of what they are reporting or
• Are so politically partisan that what they write is extraordinarily biased or
• Both situations apply to many 

Surplus Imputation Credits Tax – turns out to be a tax on low-income widows!
Insufficient research was done and this policy is turning into an embarrassment for Labor. The policy was announced in March last year as being the result of an analysis done by the Parliamentary Budget Office (PBO) for Labor. However, the PBO analysis was not released and since senior public servants take care to state their assumptions, it is likely that Labor did not want the PBO’s assumptions examined publicly.

The result has been that it is far from being a policy which takes from the rich as Mr Shorten and Mr Bowen have claimed. Analysis by Professor Sinclair Davidson of RMIT and subsequent inquiries of the PBO, have revealed that the group most affected by this policy are retirees over 70, with below average incomes. The majority of these are women, because women outlive men, and as a result widows are heavily represented. So there we have it, the main group affected are low-income widows over 70 years of age!

Contrary to Labors original and continuing pronouncements, the policy of confiscating surplus imputation credits will have zero effect on the rich whose marginal and average tax rates are above the 30 percent company tax rate on large companies.

With respect to superannuation funds, the funds which are in accumulation phase pre-retirement can easily plan their investment strategy to neutralise the impact of Labor’s policy and, for very large funds in retirement with substantial accumulation accounts over and above their pension accounts, can also can easily structure themselves. People such as dentists and veterinarians who have their practice premises inside superannuation funds, which pay unfranked rent, will also easily limit the impact of the policy.

Negative Gearing
Rhetoric about the rich cutting out the not-so-rich from the housing market overlooks the need for the community to have a large stock of rental properties for those needing to rent; many are not naturally buyers for a variety of reasons such as:

• those temporarily relocated because of their jobs
• those who have not yet reached the stage of family formation
• those who have not yet established permanent relationships and are content to live in rental units without the hassle of maintaining lawns and gardens
• the poor.

Claims that negative gearing is costly to tax revenue are bunkum. For every expense claimed by a landlord there is a party on the other side of the transaction who either makes tax reportable income, as in bank lenders, real estate property managers, tradesmen who carry out repairs, insurers etc. or a government body collecting a tax such as land tax paid to state governments or rates paid to municipal authorities. In this sense the policy is tax neutral – but as residential tenants cannot claim a tax deduction for their rent but landlords must declare the rent received, the government actually makes a profit on so-called negative gearing of residential rental property!

Those who claim a revenue loss to the government only look at one side of the tax ledger.

Senior public servants advising government, state and federal, long ago realised that the cheapest way to avoid having to fund a vast amount of public housing is to have negative gearing and to encourage the private sector to provide it. For example the Commonwealth government sold off Defence housing to private investors and arranged to have the properties rented to Defence personnel.

Negative gearing of rental housing is not something that the rich indulge in. The rich are too smart to invest in a sector which provides poor returns, after all the unavoidable costs are met. It is well-publicised that the groups most likely to invest in residential rental property are school teachers, nurses and police. This may be a cultural outcome within those professions but it is assisted by the fact banks like to lend to persons in professions which they regard as secure.

The problem
The problem with abolishing negative gearing on other than new houses, is that a new house negatively geared today, becomes an existing property when it is sold. So with buyers being unable to negatively gear it on resale, the market for it is inevitably downgraded. Who would want to buy a new property with negative gearing, knowing that if put up for sale, it will be unpopular among potential buyers who cannot negatively gear it?

The impact of the policy is that investors are likely to be deterred from purchasing new properties as they are guaranteed a fall in price because subsequent buyers will not be able to negatively gear.

This, together with other factors such as more rigorous credit assessment by bank lenders has caused a collapse in the value of residential rental properties particularly in Melbourne and Sydney. High rise apartment sales are particularly hard hit.

Capital Gains - Tax on Inflation!
With the proposed changes to capital gains tax – it is necessary to look at history. Capital gains tax was introduced by the Hawke/Keating government with effect from the 20 September 1985. The Keating model taxed the nett capital gain over and above inflation. To ensure that an investor with only one significant transaction wasn’t heavily penalised, the taxable capital gain was taxed at the rate which would have been charged had the gain been spread over five years rather than having a one-off gain push people up a couple of tax brackets and unfairly punish them. The model was extremely fair.

Even with moderate inflation an asset held for say 20 years with annual CPI growth being 2.5 percent, roughly within the Reserve Bank’s target range, would mean that the index based cost of that property would grow by 64 percent!

When Treasurer Costello, as a result of the Ralph Review of Business Taxation, changed the formula to replace the Keating method with simply taxing 50 percent of the capital gain, without the benefit of the five year averaging formula, the effective result was that capital gains tax on long-held investment properties actually increased in many cases! This fact was missed by most of the financial press.

The Labor Party are now indicating that, if elected, they will increase the amount of the capital gain which is taxable, from 50 percent to 75 percent. However, as the above example shows, on long-held gains, this would effectively take capital gains tax well into inflation territory i.e. a tax on inflation rather than a tax on real gains. Is it any wonder that there are tremors in the property market?

Personally, I would much prefer a total reversion to the Keating model on capital gains tax as it was fair to people with both long-term and short-term gains by taxing them on the real gain above the indexed base cost of an asset.

Proposals for Trust Distributions
Labor proposes to tax trust distributions at 30 percent. This measure is most likely to hurt small businesses operating through trusts. It would have negligible impact on the mega-rich whose average and marginal tax rates are above 30 percent in many cases.

Best wishes to all Vets,

Graham Middleton

Disclaimer

The information contained herein is of a general nature and no specific action should be taken without individual advice.  Speak with Synstrat staff as appropriate.

Prepared by Synstrat Management Pty Ltd for clients of the Synstrat Group.

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