When it comes to policy, it's hard not to be perceived to be political. I've been accused of being on both the left and the right, by people whose comments say more about themselves than about me.
At The Motley Fool, we're determinedly apolitical: we'll give bouquets (or brickbats) to both or either side of parliament, depending on how we see their policy prognostications.
We were fierce critics of the Coalition's proposed rollback of investor protections (the protections known as FoFA or the 'future of financial advice'), even meeting with Senator Arthur Sinodinos, and subsequently the CEO of the Financial Planning Association, on the issue. We were scathing of the 'sky is falling' claims of those who said financial planners couldn't possibly adhere to a rule that said their advice should be in the clients' best interest.
The sky didn't fall, by the way, and the Senate blocked the government's attempt to water down the rules.
We were also vocal in calling for a Royal Commission on the financial services sector. It was belated — personally, I didn't know if a Royal Commission would be able to root out the real cause of so much misbehaviour — but in the end we figured it was worth trying, and we're hopeful that Commissioner Hayne will recommend suitably large changes that get to the heart of the problem: incentives.
We now find ourselves at loggerheads with the Labor Opposition on their proposal to remove the refund of excess franking credits, and we're sceptical as to whether — if you are going to remove negative gearing — now is the right time, with house prices already on the slide. It wouldn't take much for its removal to add fuel to a simmering fire that could well tip the country into recession.
Yes, you might want cheaper houses, but they're hard to buy if you don't have a job. The right time to make those policy changes is when the market is stable or strong — just as the RBA moves counter-cyclically to add fuel when things are sputtering and take it away when the going is too hot.
But back to the removal of franking credit refunds. Yes, we're shares people. So you're welcome to accuse us of bias. But I can't for the life of me understand why you should pay more tax, on a 'look through' basis, as an owner of shares, compared to, say, property or cash.
There is just no logical basis for it.
At all.
Indeed, if you owned a property outright, versus owning shares in a company that owned that very property, under Labor's proposal you could pay different rates of tax!
Why? Search me. There is just no logical reason for it. As we've said — and this article breaks down the changes in detail — if the Opposition's argument is that retirees should pay more tax, then so be it — change the tax scales, and have it apply to all assets equally.
On the proposed changes to capital gains tax, we're a little more sanguine, at least as far as its quality as public policy. Of course, I'd like to pay less tax on my capital gains. So, speaking selfishly, I'd rather Labor not change the rules. But then, I'm also mindful that we want to enjoy a society where government delivers certain services, and they have to be paid for. We can argue who should pay — and pay more — for them, but that's an ideological argument that is beyond our role, here. There's nothing inherently right or wrong about it as a policy option.
But… there's one wrinkle. Many don't remember that when the 50% CGT discount was introduced, it replaced the inflation-linked indexation of your cost base for CGT purposes. Essentially, under the old model, the orthodoxy — which seems fair — is that you shouldn't pay CGT on inflation.
Now, reverting to a straight 50% discount on gains was a boon for people who held for only 13 or 36 months. Other than in the case of hyperinflation, you were much better under the new rule than the old. With Labor looking to drop the discount to 25%, you're still better off over shorter periods. But if you're going to hold shares (or property) for 50 years? And inflation runs at, say, 2% per year? Well, you're worse off under that policy — and you would have also been worse off under the current rules, too.
I don't know if that's enough to suggest that Labor's announced approach is bad policy, but it will likely create, as is often the case, unintended consequences.
So what do you do?
Well, we won't try to tell you how to vote. And we hope there'll be more than just financial questions that you consider when you're at the ballot box, whichever way you mark your paper.
But we will continue to speak up — and out — on the issues. We did request a meeting with Opposition Leader Bill Shorten and Shadow Treasurer Chris Bowen. We didn't hear back from Mr Shorten's office, and Mr Bowen's staff declined our request. That's pretty disappointing, given that we represent many, many readers and members who, even if they don't agree with our view, will hopefully expect their elected representatives to listen to a reasoned argument put respectfully, by a group with so many members and readers.
In the meantime, we'd suggest remembering an important approach forgotten by too many: when you invest, you shouldn't be looking for the investment that costs you the least in tax, but instead the one that offers you the greatest after-tax return.
Many — too many — people were sucked into buying an investment property because they asked their accountant the wrong question: "How can I pay less tax?".
Had they asked "How can I get the greatest after-tax return?" instead, they may have been saved a deal of pain — and be invested in better assets.
It may well be that, post-election, investment properties are less attractive than it is now, because of changes to negative gearing and capital gains tax. Investing in shares may be less attractive than it is now, because of the removal of excess franking credit refunds and the reduction of the CGT discount.
Foolish takeaway
Just be careful you don't throw the baby out with the bathwater. As Warren Buffett has written:
"…maybe you'll run into someone with a terrific investment idea, who won't go forward with it because of the tax he would owe when it succeeds. Send him my way. Let me unburden him."
Stand for better policy. Write to your MP and Senator.
But don't miss the bigger picture. If you're paying tax, it's likely because you've made money. Which is, after all, why we invest.
Fool on!
Scott Phillips
Chief Investment Officer
Motley Fool Australia
