You may have noticed in the last few days increased rhetoric from Federal Treasurer Jim Chalmers around reforming the superannuation system and its “unsustainable” tax breaks. As we approach the Federal budget, expect to again see a wide range of stories in the media calling for tax reform. They generate a lot of debate in the media and in the community and can be quite concerning for anyone who might be impacted. So, you’ll increasingly see articles about:
• Taxing the trillions of dollars in superannuation.
• Ending negative gearing.
• Increasing the GST.
• Taxing the rich and inheritances.
It happens ahead of every budget and election cycle in one form or another. These stories are basically planted by the political parties or vested interest groups to gauge what is and isn’t acceptable policy to run with ahead of the budget or an election. Meanwhile, the spreadsheet nerds back in Canberra come up with forecasts that potentially raise billions in additional taxes that they can’t believe it’s not been done before. Problem solved, no more budget deficits.
Generating billions in new taxes looks so simple on the spreadsheet. The only problem is that those four issues above are probably the most emotive financial topics at a grass roots level. Every government and opposition seemingly try new ways to tax these funds and increase their tax revenue streams but after a few weeks or months of trying every angle to open the door, they end up retreating with their tails (and calculators) between their legs.
Both side of politics have at various times positioned their proposed changes as ‘closing loops holes’ that are being ‘exploited by the rich’ but it never resonates with the average Australian in the real world. The reasons most voters reject these notions are more psychological and personal than financial or political. Below I’ve outlined why I don’t think these issues are something people need to be overly concerned about right now even as they gain attention in the press.
Everyone has super. While many don’t really pay enough attention to it, they all know it’s there and it’s their nest egg. Many workers fear that one day there will be no age pension. When the government starts talking about changing super rules or taxing super, they are messing with people’s retirement plans and their future. Their future freedom from that job they probably don’t like and work hard in every day. Not a good idea. Every single time a government tries to ‘change super’ they create mistrust. More concerningly, because they underestimate the complexity of super their changes inadvertently make the system even more complicated. It ends up compromising the integrity of the system.
When there’s talk about ending negative gearing, you’re potentially eliminating one of the few ways the aspiring working class has in their financial arsenal to grow their wealth. I say aspiring because it is mainly utilised by higher income earning workers, wealthy enough borrow large amounts of debt for an investment property but not wealthy enough to buy the property without debt. However, the pool of people who aspire to one day own an investment property is even higher than those who do. If you remove negative gearing, you conceptually kill the dreams of millions. The people intuitively understand this even if government doesn’t. The banks and property industry are also very powerful and unlikely to support this.
Increasing the GST is an obvious tax government would like to increase but presumably will be rejected by the public out of hand. Partially because any proposed increase is a direct cost to the consumer but just as importantly, the fastest way to end up with a GST rate of 15% down the track is to agree to ‘a onetime only’ increase to 10.5%. The average punter is far smarter than politicians think they are.
Wealth and inheritance taxes are potentially the easier sell if the government takes their usual Robin Hood approach to selling it. But in the end people care less about the theoretical billions the wealth may pay in new taxes and more about the thousands their family may one day pay. Keep in mind that the current capital gains tax regime already acts as a quasi-inheritance tax when a family sells an asset anyway.
So, in the weeks and months ahead keep an eye out for some of these issues gaining more attention but it with a grain of salt. I wouldn’t be overly concerned, and you can probably ignore most of these issues as you see them arise. The political parties all do it as they try to find the policies that will resonate best and those to avoid as they map out their battle plan for the nations finances. The four topics I have flagged seem to be raised on a recurring basis, yet over the years for all the concern it has caused, rarely has any material change eventuated. That said, as budget constraints become increasingly problematic in the coming years expect the pressure to ‘reform’ these areas to intensify.
General Advice Disclaimer. This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.