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How to make money out of PM Bill Shorten

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I have been worried about a number of obvious negative effects of Bill Shorten’s plans for narrowing negative gearing and for tax refunds not going to self-funded retirees. However, after discussing some of the finer points of the proposed measures on my radio podcast, I’ve actually seen opportunities for investors and retirees to make money from Labor’s planned changes.

I don’t think you can get away from the effects of the negative gearing changes. Even though negative gearing will only apply to new properties (after Labor tells us the starting date), most existing properties will have less buyers. That’s why, as an economist, I generalise that the Labor proposals are good for buyers but not for sellers.

Meanwhile, any self-funded retiree who could lose the tax refund that emanates out of investing in dividend-paying stocks that have franking credits, can’t be easily consoled about their potential loss. However, putting the two policies together creates an opportunity worth considering.

Ahead of next year’s election and the announcement date for starting the new negative gearing laws, there could be a rush by some investors to unload their properties. They could meet a market of self-funded retirees, who are so fed up with shares with their potential non-existent tax refunds and all the uncertainty of stocks, that they decide to buy an investment property at a time when house prices are on the slide.

The retirees will probably have to sell shares because lending discrimination is alive and well for older Aussies. And anyway, negative gearing doesn’t work when you’re in the zero-tax zone. In addition, the timing of the election in May next year could mean retirees could be selling their shares close to the top of the market, if predictions of a US recession in 2020 are on the money. And as the old saying goes, “sell in May and go away…” can often work out, so timing could be in a retiree’s favour, if they want to go long property before the poll.

Meanwhile, as many investors might opt out of their investment property ahead of the election to cash in on potential pre-poll buyers, there could actually be an oversupply of properties, which could keep prices soft.

Either way, there’s bound to be some speculators before the election and no one can be certain how it will actually play out.

If a current landlord decides to keep their grandfathered property, it will be because it’s likely to become the core holding in their retirement nest egg.

Steady income with or without tax concessions has a certain appeal, especially if the property is held outside super, as many investment properties are and the ‘retiree’ does earn income.

Under those circumstances, if the retiree does earn some income outside super, negative gearing tax concessions could still be useful and useable. In fact, Bill’s plans could make many retirees with investment properties look for part-time income to make the property more tax-effective!

Thank you, Bill.

Financial planners and accountants will be thinking these kinds of thoughts for their clients. And the planners/accountants is another group who’ll make money out of Bill’s proposals. These people will be fielding questions from clients and coming up with ideas to make up for the losses that will come from banning tax refunds for self-funded retirees.

This play also could be quite attractive to a younger Australian with a self-managed super fund or even if the investment is outside an SMSF because the ‘negative gearing for life’ promise (which of course could be broken by future governments) has a certain tax bottom line appeal.

Buying an investment property with ‘negative gearing benefits for life’ could excite a lot of buyers. Even though they might get less when they sell the property because it would lose its negative gearing status, this might be a pain that will be felt by the retirees’ kids when the parents kick the bucket (and the kids will face a bigger capital gains tax because Bill is halving the capital gains discount).

Government interference always leads to crazy market outcomes, just as negative gearing encouraged people with big tax bills to become landlords. Similarly, the era of low interest rates on term deposits and tax refunds, for those who invested in dividend-paying stocks, encouraged retirees to chase stocks that were effectively government-supported assets.

Bill’s negative gearing for new properties should encourage new ones to be built and some of these retirees, tired of stocks, could be buyers. However, only investors who want to be buyers and holders will show up to auctions for these kinds of properties, as resale value will be affected by the fact that investors, under most circumstances, won’t want these new-turned-old properties.

The irony is that the group Bill has planned to penalize (i.e. the self-funded retiree with the zero-tax status who get tax refunds) could end up helping him not add to the house price fall that’s already on the way.

Ultimately, he wouldn’t want to be making the same mistakes Kevin Rudd made, when he introduced a mining tax as the mining boom was collapsing.

In fact, the more I think about properties with a ‘negative gearing tax concession for life’ bought as prices are falling, the more it looks like a gift horse that even a lot of Coalition voters might find hard to resist!

Being close to Canberra members of the fourth estate, I’ve heard that a sizeable number of pollies from both sides of politics are buying investment properties ahead of the election that Bill looks like an odds on favourite to win. I ignored this news until now, when I did the analysis for this article. It might be scuttlebutt but there’s no reason why pollies would be irrational and ignore the opportunity!

One reason a retiree might not throw their weight into property and dump shares is the hope that the new Senate will make Bill be fairer to lower income self-funded retirees. It could force him to permit tax refunds up to say $20,000 or $30,000 but that’s speculation. If he gets his banning of tax refunds across the line, then a retiree will have to consider buying a new investment property or look at alternative sources of income, such as bonds, mortgage and other funds.

That’s why my business put on the Switzer Income Conference in Melbourne and Sydney this week.

Like all investors, retirees have to think about alternative sources of income for sound diversification reasons. Bill’s crackdown on tax refunds for retirees is going to force this group of investors to do exactly that.

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Published: Thursday, November 29, 2018


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