Putting A Ban On Negative Gearing

The last time I spoke about negative gearing was February 2016. The topic had been flogged from pillar to post in the media and I opined there was ‘no way’ any government would ban it. To do so would be political suicide.

Well, it looks like I was wrong.

If Bill Shorten wins the next election, and every poll suggests he’ll be a shoo-in, he is adamant he will ban negative gearing.

And it doesn’t stop there either…

Earlier this year he said he would also ban all franking (tax) credits being refunded to pensioners, superannuants and low-income earners who own Australian shares. I.e anyone whose marginal tax rate is less than 30%, which is most.

Put simply, his government will keep the tax refunds pensioners, superannuants and low-income earners are entitled to because they have paid too much tax on their dividends. It’s no different to you paying too much tax at work and not getting it back when you lodge your tax return.

But wait, there’s more. More recently, Bill Shorten also suggested he will decrease the capital gains tax (CGT) concession from 50% to 25%. I.e he will increase CGT by 50% on the sale of all assets after the normal twelve-month period.

Now, in case that’s just made your head spin, let me ‘farmify’ what all this means. It’s very simple.

The Two Paddocks
In the world of finance there are only two ‘paddocks’ (entities) you can invest in – super or your personal name. That’s it. (BTW…personal name includes trusts, etc).

Your personal paddock has great borrowing capacity which makes it perfect for buying property. It also has some tax concessions which makes it easier to cashflow a property in the first few years if it is negatively geared.

Your super paddock has a maximum tax rate of 15% which makes it a very tax effective environment to purchase shares that pay a dividend.

What that means is this. If your super owns shares which pay a dividend and that dividend is taxed at 30 cents in the dollar, your super currently gets a tax refund because the tax inside your super is only 15 cents in the dollar. i.e. its just a normal tax refund.

However, if you’re in pension stage, you currently get all that tax back on dividends because all Pensioners are taxed at ZERO percent. (And so you should, given you’ve spent your whole life working your rump off).

Taxing Both Paddocks
If Shorten is elected to office, he wants to remove the tax concessions (negative gearing) currently available in your personal paddock while simultaneously, denying all superannuants, pensioners and low-income earners the tax refunds they are entitled to on all dividends, both inside and outside super.

In other words, both paddocks get slashed.

But wait, there’s more…

The Drain
Suppose you want to sell an asset in either paddock, Bill Shorten also wants to increase the Capital Gains Tax payable on the sale of that asset as well.

Currently, there is a 50% tax concession on all capital gains if it is held for longer than 12 months. I.e you only pay CGT on half the capital gain. But, Bill Shorten wants to increase the CGT payable so that sellers only get a 25% concession. i.e he wants to increase your CGT by 50%

The Bottom Paddock
In summary, this is what it will look like for ALL paddock holders under Shorten’s tax changes.

Personal Paddock – all negative gearing will be abolished and when you cross the drain, your Capital Gains Tax will also increase by 50% on the sale of an asset.

Super Paddock – you will no longer be entitled to a tax refund even though you have paid too much tax on dividend paying shares. And, once again, when you cross the drain, your Capital Gains Tax will also increase by 50% for the sale of any assets in super.

Put simply, Bill Shorten wants to strip away any tax concessions while you build your asset base in the top two paddocks…and not be a strain on the public purse in retirement (which we can’t afford with record levels of debt).

And then when you sell, he wants to increase the tax payable on any capital gains so you end up with less in the bottom paddock.

Have a great weekend!

Adam