How to position your money for the coming Labor government

That’s the question the AFR asked on the weekend, sensibly enough, given it is a near certainty:

The newest of Shorten’s policies is a 30 per cent minimum tax rate on distributions to the adult beneficiaries of discretionary or family trusts. With farms exempt, the change will affect 2 per cent of taxpayers and 318,000 trusts. Yet the independent Parliamentary Budget Office estimates it would raise $4.1 billion over four years. Shorten’s beef is with the use of trusts for income streaming, which is not available to ordinary earners.

Beneficiaries under the age of 18 can only receive $416 a year tax-free from a trust in any case, with every dollar above $1307 effectively taxed at the top marginal rate of 47 per cent. So, under the current system, the ideal beneficiary is over 18 and not earning much – a university student, for example – because they will have a low marginal rate and possibly even room under the $18,200 tax-free threshold. Eligible beneficiaries include children, parents, grandparents, brothers, sisters, spouses, nephews and nieces. Uncles, aunts and cousins are ineligible.

…Aaron Fuda, a mortgage broker with Omniwealth, is advising investors who are intending to borrow in their SMSF to bring those plans forward. “The next federal election is due to be held in late 2018 or early 2019, and if Labor wins it has plans to introduce legislation to stop SMSF lending,” he says. “This is a significant change, and places uncertainty around SMSF lending until the next election. Something you hear a lot when a major change occurs is, ‘Oh darn, I was planning to do that’.”

…”It’s obviously a long hold, generally 10 years and usually more, so you’re through several property cycles before you look at selling,” he says. “I’ve got clients in their mid-30s who are buying property inside super. By the time they are 65, they are going to have an appreciated asset they can sell without any tax. You don’t know where property prices are going, but you’d assume upwards in the next 25 to 30 years.”

Which brings us to another of Labor’s policies: limit negative gearing to new property and halve the capital gains tax discount. Cortis says he is urging more caution about investing in real estate than he has for many years. This is the result of a combination of likely interest rate rises and the prospect of a Labor government. “The general consensus is that interest rates will rise by another half a per cent next year,” he says.

The macro-economic consequences of this are obvious. Property prices are going to fall. So are interest rates as the economy weakens. And the Australian dollar will follow both.

Labor will respond with fiscal spending and sustained mass immigration. More building in other words. However, the Labor strategy will run into trouble fast if and when the next global shock arrives which will threaten to turn the property correction disorderly just we run out of rate cuts. If they have any brains at all they will also smash the east coast gas cartel with much stronger domestic reservation.

For investors, the top priority, then, is to sell property. For local shares, sell banks and energy, hold building materials, education, tourism and dollar-exposed industrials. Miners are already a sell on a slowing China.

To me, the easiest and most obvious way to position yourself is unchanged with the arrival of Labor. Get your money offshore to benefit from growth in other already deleveraged economies and exploit your weak currency.


David Llewellyn-Smith is chief strategist at the MB Fund which is currently overweight international equities so he is definitely talking his book. The MB Fund offers one way to profit from a falling dollar:

Source: Linear, Factset

The returns above include fees and trading costs on a $500,000 portfolio. Note that individual client performance will vary based on the amount invested, ethical overlays and the date of purchase. The benchmark returns do not include fees. October monthly returns are currently at 4.9% for international and 4.2% for local shares. 

If these themes and the fund interest you then register below and we’ll be in touch:

The information on this blog contains general information and does not take into account your personal objectives, financial situation or needs. Past performance is not an indication of future performance. The MB Fund is a partnership with Nucleus Wealth Management, a Corporate Authorised Representative of Integrity Private Wealth Pty Ltd, AFSL 436298.

Comments

  1. FULL PAGE ADD Sunday Mail……https://www.putthemajorslast.com.au/

    Dear Queenslanders,
    I am sick to death of these puffy faced ALP and LNP politicians looking down the lens of a camera saying stupid things to me in my living room every night. SHUT UP! You’re not smart or clever. You’re just taking turns at stuffing our State. You’re not fooling anyone and I for one am not going to sit quietly in the corner and go along with the charade.
    In case you’re wondering, here’s what people are saying about you at my workplace:
    The ALP is more green than the Greens. They have no connection with blue collar workers or the protection of workers’ rights. They have no interest in looking after average mortgage paying families. They’re all sitting around in their moccasins, sipping lattes in West End with their hairy armpitted, tree hugging, dope smoking, underemployed academic hangers-on, dreaming up ways to ban anything that’s fun. Even the ALP voters aren’t proud of who they are.
    And please, don’t you LNP pollies smile. They don’t think much of you either. You’re a bunch of sell-outs ruled by the big end of town! Puppets that will say and do whatever pleases anyone on the CBD side of the Brisbane River. A bunch of razor-gang style accountants ready to sell off our State assets whenever you can. Where’s the big vision? Where’s the fight? You’re happier in opposition because you can get home at 5.00pm every night and watch TV. Stop insulting rural and regional Queensland! You are never going to give them a say. I guess they are too far from Clayfield to matter. Oh yes, there is more to Queensland than Clayfield.
    Here’s some news for you… we don’t have to take it. The ALP and LNP don’t have a “born to rule” right to take turns at stuffing our State.
    We will get whatever government or politician we vote for. So, I’m not voting for either of you. In fact I’m going to put the majors last.
    Feels good to get that off my chest.
    Feel free to contact FLICK’EM yourself if you want to help spread the word and have your own rant.
    #PutTheMajorsLast

    Signed,
    One pissed-off Queenslander.

  2. adelaide_economistMEMBER

    Aaron Fuda, a mortgage broker with Omniwealth, is advising investors who are intending to borrow in their SMSF to bring those plans forward

    This is right up there with the common advice during the GFC to buy a house if you thought you were about to be made redundant. You know, because it was all about ‘getting on the ladder’ regardless of how you were going to pay for it afterwards.

    The whole thing is speculative and the more legs that are kicked out from under it means there’s even less reason for prices to continue climbing. Which leads me to…

    You don’t know where property prices are going, but you’d assume upwards in the next 25 to 30 years.

    Well, yes, it’s likely that’s true. The 1890s bust shows us though that it can go very bad in property for decades at a time. More relevant I think though would be what any price rises you get over the next 25 to 30 years constitute real growth above inflation. Surely that’s the question a ‘savvy’ advisor (and their savvy clients) should be thinking on. But alas this is Straya and house gainz are gainz even if they are a loss after costs and/or inflation.

    • Those guys who “got on the ladder” and didn’t get redundant in2008 (that is to say, most guys) are WAAAAAAY ahead.

      It’s still got legs. I’ll be waiting until it’s on the floor in a pool of blood before declaring it dead.

      • As I’ve always said here “If you want this damned thing dead you have to KILL it”
        I remember my comment getting a rubbishing by MB at the time.

    • I read the other day, something like “muppets that don’t understand inflation’s affect on asset price gains”. That’s literally me. I don’t get it.

      If I own a (hypothetical) property that’s costing me nothing year after year but has gone from say $500k to $1m over 24 years (i.e. grown at the inflation rate), and also now returns rent at double what it did 24 years ago. For me, it looks as though inflation has gifted me a property and also a rental return.

      Clearly I should have gotten my head around this 24 years ago and if appropriate bought ten of them. Instead I own very little real estate.

      I’d love to get views on inflation’s affect.

      • boomengineeringMEMBER

        If you owned that property and sold it 24 yrs ago put the money elsewhere then you could have had an unbubbled nest egg instead of lost opportunity tied up. Like a pyramid selling scheme you could be a winner if you got in early and sold at the right time but but. If on the other hand you put the money in the bank, inflation rate is normally higher than the interest rate so the intrinsic value of you money has deteriorated.
        If the inflation rate was ever higher than the interest rate then whatever you bought on credit would be worth more in future than what you would have to pay back, you would then borrow to the hilt if you could stomach the fear of change.

      • boomengineeringMEMBER

        continued, Without some sort of change, population increase, zoning,, local amenity, increased building density, renovations etc etc, house values would naturally go down as the land may keep up with inflation but the house would devalue( like a car ) dragging the total down.
        The rent money 24 years ago would buy more things then than now under normal inflation circumstances.

      • boomengineeringMEMBER

        continued, Lack of adequate wage inflation has also to be considered, inflation hasn’t gifted you a property if wage inflation exceeds nominal inflation as you could buy the property more easily now than then

      • boomengineering

        “Gee’s must be my worst post all over the place missing stuff”

        Not at all. Well explained. Thanks for that.

      • If you borrowed the money to buy the property 24 years ago you would be way in front no matter what.

        I remember many years ago – like about 15 doing an exercise with my son on investment in Sydney Res RE. Because of the gearing available in RE, and the tax issues, you’d have had to get a 26% return on another investment to match the return in RE.

        While I ma on the topic Boom – with money in the Bank you not only lose on the inflation front you document – THEN you have to pay bloody tax on what little you do nominally get.
        Hence my insistence that, if we are evaluating investment, or policy we have to use RAT interest rates.

      • boomengineeringMEMBER

        Correct Flawse in your example BUT he was inferring that no debt was in the equation. AND we have to separate wage inflation/real term deflation,house price inflation and other general inflation’s to make the example easy to understand,( as he said costing me nothing year after year) then little by little add the idiosyncrasies which include pyramid or bubbles.

    • http://www.alp.org.au/negativegearing

      Labor’s Proposal

      Labor will reform negative gearing and the capital gains tax discount to ensure that our tax system is fair, sustainable and targets jobs and growth.

      Negative gearing

      Labor will limit negative gearing to new housing from 1 July 2017. All investments made before this date will not be affected by this change and will be fully grandfathered.

      This will mean that taxpayers will continue to be able to deduct net rental losses against their wage income, providing the losses come from newly constructed housing.

      From 1 July 2017 losses from new investments in shares and existing properties can still be used to offset investment income tax liabilities. These losses can also continue to be carried forward to offset the final capital gain on the investment.

      Capital gains tax

      Labor will halve the capital gains discount for all assets purchased after 1 July 2017. This will reduce the capital gains tax discount for assets that are held longer than 12 months from the current 50 per cent to 25 per cent.

      All investments made before this date will not be affected by this change and will be fully grandfathered.

      This policy change will also not affect investments made by superannuation funds. The CGT discount will not change for small business assets. This will ensure that no small businesses are worse off under these changes.

      Labor will consult with industry, relevant stakeholders and State governments on further design and implementation details ahead of the start date for both these proposals.

      • BB – I don’t think so. The ALP policy was announced in Feb 2016, for the election held in July 2016. Hence the date of July 2017 for commencement.

        My assumption is that they just haven’t updated the start date but will at some point before the next election. I have no insider info (nor any particular faith in the ALP) but their website bangs on about not acting retrospectively and not surprising people. And i think that is politically smart. So no, I don’t think their intention is to backdate it.

    • I am curious to know if the dialing back of CGT will be applied across the board or will it be aimed at housing only? Given all the government incentives to get into housing over the years I’d be happy to see it focused on housing only.

      • The Wealth Navigator

        Interesting question as according to ato data more capital gains subject to income tax for assets other than property. For example I have seen data that 37% of adult australians own shares when only 22% own investment property. So who will be hit worse from the change in discount?

    • Australia’s not going to elect Labor (probably ever again) IMO. They either get back to a party for working Australians or they’re finished. If we’re going to sell our country and populate we may as well have LNP where at least if you have a go, you can make some money and carve out a good life.

      I despise corporate, global cut throat LNP. My preference is Labor from twenty years ago, but that’s twenty years ago. Today’s Labor is a complete betrayal of existing Australians.

      • I agree. If the LNP want to win then they need to play the immigration card and hard because Labor certainly will not and will more than likely increase it.

      • Stephen

        I agree, and am eagerly awaiting that. I do not want to see Shorten, Plibersek, Wong and all those other big Australia Labor clowns with more power.

      • Australia never vote labor or LNP IN. They chose when to throw out the current Government. Australia has had enough of the LNP so Labor will get in. This is why someone like Howard was elected – Australia hated him, but they hated the Labor government more.

      • @glamb

        True, but this time I’m suggesting the electorate’s looking elsewhere to cast their vote. Our democracy is broken, and finally the electorate’s openly talking about it.

      • I’ll have at that bet : $5.
        I bet you $5 that at some point in the future, Australia WILL elect a Labor govt and it’ll likely be next election

        However, our bet is: Australia will never again elect a Labor Fed govt.

      • Labor are a shoo-in. They’ll promise more money for heath and educashen. Nobody else cares about the future of our children except Labor!
        They’ll reap what they deserve i guess.
        I’m just puzzled as to what the LNP are going to run on. Maybe they’ll do ‘Jobsen Growth’ again, It was so successful last time.

  3. I think it’s good advice. I think look to Victoria and what’s been happening to see what will happen with Bill. I desperately hope he’s not as hopeless as MT, but can he control those who’d have his job, and the farce will roll on. There’s part of a Oils song that I keep hearing “Short memory, must have a short memory”

      • Agree Stephen, Matthew Guy creeps me out. Re Andrews I’m commenting of the population ponzi (and all that bring with it), and his stand over tactics, and other issues like he had to be dragged to address the crime wave here. I just think we get self serving POS that want to line their pockets via various means, then tumble into corporate world after. I’ve seriously had enough and will never vote for a major party now.

  4. So basically, Labor policy will ruin investment returns in Australia and you are better investing overseas? Was that the general gist?

    Implication of Labor policies:

    (1) End negative gearing on investment properties: Lower prices for 2nd hand apartments; lower prices for new apartments (since investors are rational and realise their new apartment will be 2nd hand eventually; larger gap between resale prices and new prices such that if new prices fall 5%, 2nd hand apartments will fall by 10%.

    (2) Changes to taxation of trust distributions: Less demand for investor housing assuming more family trust money is invested in housing than the share market;

    (3) End SMSF lending: Reduced investment in property;

    (4) Increase capital gains tax for all assets: Rather than put your savings in the share market or investor property, I would simply buy a bigger family home.

    Implications: Existing units decline relative new units; much less demand for investor housing and hence less supply and higher rents; Increased demand for large occupier housing.

    More risk averse banks worried about the housing market requiring higher deposits etc.

    Less capital in Australia, therefore lower Australian $.

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