Bill Shorten and Chris Bowen are proposing the single greatest governmental assault on the capital formation process and investment that we ever seen in Australia. Both property and shares are set for a policy overhaul.
It is utterly unprecedented in the 73 year post-war period of modern Australia and would produce a massive shift in both the overall investment environment and the specific dynamics which have broadly prevailed since the Hawke-Keating period of financial deregulation and tax reform in the mid-1980s.
The attack has three components: the abolition of future negative gearing on existing properties, the halving of the so-called capital gains tax discount, and the termination of the refunding of excess franking credits.
Now, two points need to be stated up front. First, as the first two moves will be grandfathered - or at least, that is the pre-election promise: what if circumstances are considered to have “changed” post-election? - the immediate impact will be limited. The practical effect might even seem (deceptively) benign.
That of course does not apply to the third, which will impact immediately, impact significantly on a range of individuals from high net worth to those of relatively modest incomes, and spark immediate and significant changes in investment behaviour.
Secondly, while each can be individually justified - if not most definitely in my opinion, in the ways or extent proposed by the Labor duo, it is their combined impact which will be so significant and so damaging. Labor certainly has not the slightest idea of what the policy combination will do to the capital formation process and to investment decisions and outcomes; and even more importantly, what the flow-on consequences will be.
In respect to the negative gearing disaster that would flow from the Shorten-Bowen “good idea”. Briefly, it would send lower income earners and lower net-worth individuals, whether as owner-occupiers or investors, into precisely the sort of properties that have the worst investment characteristics - inner-city apartment boxes and city-fringe postage stamp houses.
There is a perfectly sensible, simple and non-distortionary alternative: limit investment property deductions in any one year to investment property income; with any excess able to be carried forward to be deducted against future income or capital gain.
As to the proposed changes to CGT, the proposed Labor cut to 25 per cent could do exactly the opposite as it is introduced, especially with grandfathering, just as potentially we enter a yet new world of slowed asset inflation and potentially higher goods and services inflation.
In any event, the reduction combined with the grandfathering will discourage the sale of assets and the realisation of capital gains. This would certainly encourage “bad” investment behaviour and potentially “force” higher net-worth individuals to accumulate even greater low-tax wealth.
This three-pronged assault combined with Labor’s refusal to cut the corporate rate from 30 per cent would prove extremely damaging to the economy and not just in “the long term”.
And it will be delivered by a Labor-Green government with a majority in the Senate.
Adapted from Terry McGrann - AFR