What if Labor wins the election?

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Australian Federal Election 2019

The battle between Bill Shorten and Scott Morrison is not likely to overwhelm us with charismatic and inspiring speeches. Rather, it’s likely to be the political equivalent of a street fight. In short, I suspect Shorten wins because Australians vote leaders out if they annoy them, rather than vote a leader in. The Liberal party leadership issue annoyed a lot of voters.

Another important trend is that times have changed in the era of social media, and people are generally more progressive in their thinking than in the past. A good example of this is the same-sex marriage vote where roughly 70% of the population voted for it . Go back 20 years ago and it’s probably 70% against. This is the case in relation to many issues and many of the old heads on the conservative side haven’t picked the change in the community’s view. It will be a close fight and a lot can happen between now and then, but it appears the election is Bill Shorten’s to lose at this point. 

What does this mean for our clients? Many of our clients have already raised concerns around the upcoming federal election. Specifically, the concerns raised relate to some of the policies the Labor party have proposed in relation to property (negative gearing and CGT) and dividends (franking credit refunds). These are attention grabbing policies, but also typical of parties testing the pre-election market or appetite for these types of policies.

Negative gearing: The potential removal of negative gearing is far more nuanced than politicians seem to understand. This is not a strategy of wealthy property owners. The wealthy property owners actually have little to no debt. They have paid their properties off. This is a strategy of people on good income, using debt to try and build their wealth – that’s a lot of people. But here’s the thing, removing negative gearing doesn’t just impact those people, it also impacts those who aspire to buy an investment property in the future. That is a lot more voters than many appreciate and why I’d be surprised if it gains real support. In fact, I think it’s hard to find a group of voters that will actually support this proposed change. Let me know if you can think of one.    

Franking Credit Refunds: Another key proposal relates to removing the refunding of excess franking credits. Many people have investment portfolios that result in dividends with franking credits attached (tax already paid by the company) that offset the tax from their overall income. Where people have franking credits in excess of the tax owed, they receive a refund. The proposed change would now result in those refunds being lost, impacting self-funded retirees in particular. However, it’s worth noting that before the year 2000 that was how it worked. Back then portfolio construction included detailed consideration of the total income and total franking credits received so that franking credits were not lost or at least could be well managed. I would expect this to again become an important management strategy for investors. 

Superannuation: Regularly changing superannuation rules effectively undermines the integrity of the superannuation system. Both sides of politics are guilty of this because they don’t appreciate that to have confidence in the system people need to feel that the goal posts won’t move. But it is inevitable that politicians look at the massive pool of money within the superannuation system, crunch the numbers, and see that even a small percentage change will result in a windfall of billions of dollars. So, they always propose changes, usually to make the system ‘fairer’ because who would argue with a fairer system, right? But everyone has super now, and they don’t want the government touching it, so when this happens the voter outcry causes them to shelve the proposal.

In conclusion, I would be surprised if these policies actually become law in the form initially flagged. Typically, significant changes that impact a lot of people are met with voter outrage and are shelved, diluted or grandfathered all of which result in minimal real impact for those initially targeted. We are watching these developments closely and planning ahead.