Budget Winners and Losers

Hi Everyone,

We've now had a few days to reflect on the federal budget. This newsletter will attempt to summarise the winners and losers, but from a practical financial advice perspective.

For those looking for a quick summary of what the budget changes mean, I would say investing in growth assets like shares and property remains appropriate and important for growing wealth, however how you own these assets for tax purposes has changed significantly (especially for those far away from being able to access their super). For older Australians already using their superannuation for investment and income, they are largely unaffected (at least not directly).

I'll stress here, the legislation is not yet before parliament and is yet to become law, however I've assumed the changes go through largely as announced for now. These are purely my views as a Certified Financial Planner (CFP®), with over ten years of experience, and are not meant to be political in any way.

Winners

Superannuation

As noted previously, no new changes were made to the rules or tax rates in the budget (the change to tax rates in super for balances over $3m per individual, were legislated beforehand). This means, in effect the minimum tax for income and capital gains outside super will be 30%, while in super the maximum tax is 15%, or 0% in the super pension phase post-retirement.

This makes superannuation by far and away the optimal investment structure, from a tax perspective, for most Australian's. However, access to super is restricted until at least age 60, under current rules.

Self-Managed Super Funds (SMSF)

SMSFs are the only superannuation structure that allows direct investment into property (you can't buy a property in your industry or retail super fund/platform). Over the last few years, SMSFs have reduced in popularity as other super platforms, such as Hub24, BT Panorama & Netwealth, have given Australian's control of their super investing without the significant administration obligations a SMSF requires. However, following the proposed tax changes, anyone wanting to invest in property now will have to at least consider setting up an SMSF, given the significant tax benefits of investing in super over our personal names.

To be clear, SMSFs come with significant administration and compliance obligations and can be expensive to set-up, especially to invest in property. They are not appropriate for everyone.

SMSF/Property Packages

In my last email, I referred to 'spruikers' who advertise setting up SMSFs to invest in property, promising incredible returns to set individuals up for retirement. Unfortunately, often times, the 'Adviser' has a financial stake in selling the property and the investor is left with an SMSF they don't understand and all their retirement savings in one property that has poor investment fundamentals. Given the advantages now of investing in property in SMSFs noted above, these SMSF/Property packages will be advertised heavily, especially on social media. Done incorrectly, or dishonestly, these packages can be devastating for everyday Australians.

If your friends or family talk about being interested in this, please give them my details.

Education/Investment Bonds

I won't go into the complicated details of how these bonds work here (they are not the same as bank or Government bonds), but for high income younger Australians, Education and Investment Bonds may become more popular due to the tax rules around them (30% tax within the bond, and tax-free withdrawals after ten years, including on capital gains). Education Bonds allow withdrawals of capital invested within the ten year rule for education expenses as well.

These bonds are not as attractive as superannuation from a tax-perspective, but can be accessed at any age, subject to the specific rules of each bond. I've messaged two different bond providers and they've both confirmed they don't believe the new rules impact their current tax arrangements; however, this is obviously subject to the details in the legislation.

Neutral

Investing in shares

I've seen some commentary on how investors will switch from investing in so-called 'growth' shares (such as international shares that don't provide dividends), in favour of 'income' shares (i.e. blue-chip Australian companies that pay dividends, such as the banks, miners, Woolies/Coles etc).

In my view, our strategies for investing in shares don't change significantly because of this budget. We still want international shares for our portfolios to grow, and Australian shares to provide some income too. As noted above, what is far more important is what tax structure we use to invest in, depending on individual circumstances.

Investing in property

Given the changes in the budget have been, according to the Labor Government, designed to assist intergenerational fairness (with a focus on housing), you may be thinking shouldn't investing in property be in the loser's section. My answer is investing in property still remains an appropriate and viable investment option (we still have a significant housing shortage), however with some important caveats.

1. The removal of negative gearing and the 50% capital gains discount, along with the 30% minimum tax on net capital gains and for family trusts, makes investing in property in our personal names much more difficult. Understanding the cash flow impacts of the new arrangements before investing is even more essential, given losses can't be used to reduce tax anymore.
2. Due to the tax benefits of superannuation, considering using an SMSF must be at least considered as part of property investment discussions.
3. Buying a property to create wealth, but living in the property first, will also be a popular option due to the exemption on capital gains for the principal place of residence. Parents may even consider an early inheritance to assist with this, especially in more expensive cities.
4. Using a Property Adviser to buy a property with strong fundamentals is even more sensible, given we'll likely see slower growth in property overall.

Losers

Young Australians

I'll stress again I'm not trying to be political here, but this budget, which has been expressly targeted at improving intergenerational fairness, in my view makes it harder for young Australians to build wealth. They should still invest in shares and property, but they are going to have a heavier tax burden to do so, which means building wealth will take more time (and as of now, they've received no income tax relief to compensate). Property is still likely to grow in value over the long-term, but even if this is slower post-budget, it's now harder to build a deposit.

Yes, they have options for structuring the investments for tax purposes (which I've noted in the winners above), but these are far less flexible than the options pre-budget, and therefore requires careful financial planning as early as possible, given the significant tax consequences of getting their structuring wrong post-budget.

Family Trusts

A base 30% tax on income and capital gains for a family trust makes them less attractive from a tax perspective. There is no tax credit on the 30% tax for bucket companies, effectively making the strategy of directing distributions to bucket companies taxable at approximately 51% after franking (this is a particularly complex strategy that I won't go into here, but is most commonly used by wealthier Australians).

Where investors may have previously used family trusts to hold their investments, for tax flexibility, they may need to consider other options moving forward. Trusts will still exist and have asset protection benefits, but I expect a drop in the number of new trusts opened in future.

If you would like to discuss how this may impact you, your family or friends, please don't hesitate to reach out or pass my details on.