With the tax system changing and house prices likely to fall as a result, other investment types might now become much more appealing.
, a free weekly newsletter giving expert tips on how to save, invest and make the most of your money, is sent every Sunday. You’re reading an excerpt –It’s been a big week for money nerds, as Tuesday night saw Treasurer Jim Chalmers stand up and announce a whole raft of changes to how Australians are taxed on investments in an attempt to close the yawning intergenerational inequality divide.
On the chopping block was the 50 per cent capital gains discount, negative gearing on newly purchased properties, and family trust tax-splitting. And you know what? Good riddance to the lot of them. Michael Howard With few exceptions, these policies have allowed those with wealth to further entrench their privileged position, all while making things more difficult for younger generations.
Yes, you could argue young investors were benefiting from the CGT discount and this will just make it harder for them to build wealth and so on. But 83 per cent of the benefit of the current CGT discount currently goes to those in the top 10 per cent of taxpayers, so I think it’s pretty clear who really had their hand in the cookie jar.
The government’s changes are far from a panacea, but they will make some meaningful progress towards improving our taxation system. They’re also set to change the equation on the age-old question of whether it’s better to invest in property or shares. For a long while, many Australian investors have been drawn to property due to its favourable tax treatment and its seemingly unending ability to appreciate in price.
But with the tax system changing and prices likely to fall as a result, non-property investments might now become a much more appealing option. So if you’re wondering where might be best to invest now, read on:The choice to invest in property or shares has always been a bit a “personal circumstances” one, depending heavily on your appetite for risk and how hands-on you want to be with your investing.
However, the removal of negative gearing seriously alters the calculation, as it makes buying a loss-making rental far less appealing. Couple this with the end of the 50 per cent CGT discount, and shares start to look like a suitable option.
“With negative gearing now restricted and capital gains tax less generous, investment property becomes a less compelling proposition,” says Rob Wilson, director of investment strategy at online investment platform Selfwealth. “For investors weighing up where to deploy capital, shares offer something property doesn’t − liquidity, flexibility, and less policy risk.
”The ending of the 50 per cent CGT discount will, of course, also affect returns for investors in equities, especially older investors who may be most affected by the new 30 per cent baseline tax set to be introduced. For this reason, Andrew Buchan, partner wealth management at HLB Mann Judd Brisbane, believes we may see a move away from growth stocks towards more steady, yield-producing assets, especially ones offering franked dividends.
“Shares with franking credits may become more favourable – they’re much easier to sell in small parcels,” he says. “More broadly, as the restriction on negative gearing only applies to established residential property, using negative gearing with other growth assets including Australian and international shares may become relatively more attractive for those with suitable risk profiles.
” Buchan also thinks investors may shift more of their portfolios towards other market-linked investments, such as bonds, or instead funnel more of their income towards their superannuation given the favourable tax treatment within super. Options for keen property investors have become more limited, but Labor has included a carve-out for new builds which allows them to still be negatively geared.
The new policy will only allow rental losses to be offset against other rental losses, so investors with large property portfolios may be able to continue to negatively gear if they have other properties which are positively geared to offset against. Of course, you can always just buy property as an investment without trying to take advantage of an overly generous taxation scheme. What a novel thought!
The changes to negative gearing and CGT won’t come into effect until July 1 next year, and the government needs to legislate them first, which could significantly change the outcome. However, Buchan says all investors should start keeping diligent records of their asset prices, especially come July 1, 2027, as the new CGT calculation will refer to the asset’s value as of that date.
“It may also be worth revisiting dividend reinvestment plans and dollar-cost averaging arrangements,” he says. “While these strategies may still be appropriate, any new parcels acquired from July 1, 2027, could be subject to the new CGT methodology. ” Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products.
They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.
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