Now that the dust has settled around the feet of Malcolm Turnbull and his dramatic entrance into the Prime Ministership, the focus has shifted to what is sure to be a key plank of the next election, tax reform.
It’s a touchy issue which politicians have talked about for years but never really delivered for fear of voter backlash. Everyone knows there has to be tax reform but no-one has the guts to actually do it.
And with a growing national deficit worth billions of dollars and both parties scrambling for solutions to our fiscal fiasco, it’s important to understand what tax reform means for investors and the economy.
Let’s take a look at the options being thrown around.
Although Turnbull has stated that a GST increase isn’t on the cards, it’s worth looking at how it would affect the economy should he decide to change his tune. Because there are big dollars to be earned and this would be easiest quick fix to budget deficit issues.
It’s likely a change to the GST would either increase it to 15 per cent across the board, or be applied to current exemptions like fresh food, health and education at it’s current level of 10 per cent.
But the GST is known as a regressive tax, meaning that any increase will primarily effect low and middle income earners, as they spend a larger part of their pay packet simply getting by.
Result for investors: Softer retail sales as tax takes greater share of family budget.
Under the current arrangement, superannuation contributions are taxed at 15 per cent and provide tax cuts to those who earn the most. This cost the budget a whopping $25 billion this financial year alone in tax benefits.
Amending this to the marginal rate of tax would have added an extra $17.7 billion dollars to the bottom line this year.
Result for investors: Softer asset prices as the pool of money super funds have to invest is reduced.
As it stands, negative gearing sets the federal budget back between $2 billion and $5 billion each year in tax concessions. That’s big money, but what would happen if they changed it?
Under Labor’s proposed changes, negative gearing would be restricted to new properties only, a move that many property experts claim would force landlords to increase rents to cover their costs.
Others look back to the prior abolition of negative gearing in the late 1980’s, where there was no attributable rise in rents, something that was also mirrored by a similar move in the US in 1986.
Result for investors: Softer property prices and fewer new developments as tax incentives are reduced or removed.
Booming property prices have yielded massive capital gains for investors, but made it increasingly difficult for younger Australians to get a foot on the property ladder.
The current property tax breaks in this area are costing the budget around $55 billion every year, according to the Treasury. This is a big problem no matter which way you slice it; here you’ve got policy that favours wealthy investors, costs tax payers billions and creates unrealistic expectations for first home buyers.
That’s where a land tax comes into play, as its introduction to tax the family home would go some way to levelling the housing playing field.
Result for investors: Softer property prices as a result of higher transaction costs.
Did you know that individuals who earn a capital return via investments can only pay half the tax of those who earn an income through working for wages? And those who earn an income from interest bearing deposits are forced to pay the full income tax rate too.
The idea in this scenario is a level playing field when it comes to taxing income returns and capital gains… to either include interest bearing accounts in the discounted rates, or tax capital gains the same as income.
Of course, this kind of measure would turn off anyone looking to use negative gearing, as their share of gains would undoubtedly be effected.
Result for investors: Softer property and equity prices if tax incentives are reduced or removed.
Superannuation is an important and often overlooked aspect of our finances, but if we want to have a comfortable retirement, we need to pay attention to what’s going on.
While we should always have our super in mind, there are some times that are more important than others to make sure you’re still getting the best possible performance from your fund.
. WHEN YOU CHANGE JOBS
Your new employer will give you a form to fill out for your superannuation details.
If you’re in the same industry, provide your current fund details to continue using that fund.
But if you’re starting a new career, consider which super fund is best for that industry. If you do open a new account, make sure you transfer all of your funds to the new one, or you’ll be paying two sets of fees for no reason.
. WHEN YOU MOVE HOUSE
Your super fund should always be up to date with your latest details, most importantly, your address.
It’s a good idea to take this opportunity to review your entire account and whether it’s still the right fit for you.
You can use any number of comparison websites to see how your fund measures up to all the others.
. EVERY ONE TO TWO YEARS
You should review your super fund at least once every two years for a number of things.
To make sure your details are current, that you’re aware of all the fees you’re paying and that you are taking advantage of useful extras like income protection.
If you want to know more about how your money is being invested, call your fund and speak to a professional who will talk you through it.