Peter Switzer: Hello and welcome to Switzer Investing Insights, brought to you by Nabtrade and with an election looming in May and the polls suggesting there could be a change of government, it might be timely to look at the key policy initiatives to see how investors might be affected. Paul, let's start with negative gearing.
Paul Rickard: Yeah this change has been really well telegraphed, subject to a lot of debate Peter.
Paul Rickard: So negative gearing will be limited to new houses. The change will be grandfathered. So only applied to assets purchased after a commencement date. The LP hasn't yet announced that commencement date. Importantly, interest will still remain in a level deduction, just won't be able to deduct the net loss, where the expenses exceed the total income.
Paul Rickard: It also applies to other assets, so shares that are the subject of a margin loan, potentially also are going to get caught up and in terms of the impact Peter, there's been a lot of debate about this. Most commentators agree, it's probably a negative for the property market. Some argue that this impact's only going to be transient. Some commentators also argue that maybe rents in the long term could increase. But I think there's debate on both sides in terms of what this actually means to people.
Paul Rickard: In terms of the share market, I mean we're going to see some impact possibly on some property writers stocks. So exams on potentially a company like Rio, that's the listings group. If listings decline, that could impact their profits. Mortgage choice, if mortgages come off, because there's less investors in the market they could be impacted.
Paul Rickard: Maybe some of the home builders, companies like Stockland, could actually benefit because your more money might go into new housing Peter. So it's a bit of what should, in terms of the share markets, hard to actually say, what that's impact going to be.
Peter Switzer: Okay let's go to the tax on capital gains, Paul.
Paul Richard: Well this affects all assets and this is a change on the discount rate for an individual on their capital gains. Currently there's 50% if you hold an asset for more than 12 months. The IOP says they'll reduce to 25%. So effectively, 75% of the capital gain will become taxable. Individuals who are paying CGT, at their marginal tax rates and the highest effective tax rate, will rise from 23 and a half percent to 35 and a quarter percent.
Paul Rickard: The good news, Peter, I guess if there is, for investor the change is grandfathered. So it only applies to assets purchased after the commencement date. Again, that hasn't been announced. It will apply to all assets and there aren't any changes to capital gains tax treatment for super funds or for companies.
Peter Switzer: So that code implies that the mark itself won't be instantly affected, it could be an effect over time.
Paul Richard: Yeah this won't have an immediate effect in the market peter. This is a longer term effect for investors and only when they're realizing assets that they buy, after the commencement date.
Peter Switzer: Okay. Let's look at the cash refunds of excess ... A lot of people would say the tax refunds to retirees, who are self-managed super funds.
Paul Rickard: Well this is probably after negative gearing had the most discussion. Because it does impact a lot of retirees, self-funded retirees. The idea with this is excess frank and credits on shared dividends. If they cannot be applied, will cease to be refundable. So at the moment, if you have access frank and credits, you actually get a check back from the Australian taxation office.
Peter Switzer: The best envelope of all.
Paul Rickard: One of the best envelopes of all. It only starts from the first of July 2019, so it won't apply to dividends received before the first of July. But only applies for dividends received after that date.
Paul Rickard: It impacts lower rate and zero rate tax payers, potentially for example a self-managed super fiend in pension phase. Important to note that high rate tax paying individuals, people paying tax at a rate of over 30%, foreign investors. Most international investors, they're not impacted by the change at all. There is also some exemptions that they've announced for persons in receipt of a government benefit.
Paul Rickard: Of course like all taxation changes, this will require legislation in both house of parliament. So it's one thing for the policy. If there is a change of government, they'll still have to get this through and potentially through a hostile sentence. So there could be a lot in terms of what the policy looks like today, assuming there's a change of government and however it's finally legislated.
Paul Rickard: It's arguably a negative for potentially the stocks fully frank dividend stocks, things like the major banks, hybrid securities, Telstra, listed investment companies and a premium and possibly a positive for other investments that don't pay frank dividends. But it's hard to say. This change has been in the market now for some time.
Paul Rickard: We already saw a bit of an impact last year. It's a question whether it's already a case of buy the room and sell the facts. So I caution about investors acting prematurely about this change. Really it's got a long way to go before it makes its way through the houses of parliament.
Peter Switzer: Some people are suggesting there could be a cap, there could be a 5,000 or a $10,000 cap, where retirees and self-managed super funds could actually receive that kind of tax. Other than that, they wouldn't get it.
Paul Rickard: Well that's right. As the policy stands today and what it may look like in legislation could be two very different things.
Peter Switzer: Alright Paul let's get super and the tax right changes.
Paul Rickard: Yeah on the tax side, the proposal is to increase the highest marginal tax rate from 47% including the 2% Medicare levy to 49%. On the surface side, the suggestion is that the no concessional cap will reduce from currently $100,000 to 75,000.
Paul Rickard: The threshold for the so-called division 293 tax. That's the extra tax that high income earners pay on their compulsory super annulation contributions. Currently that threshold sits at 250,000. It will be lower to $200,000 and applied all the super annulation contributions someone makes there, in terms of their concessional contributions. Then finally, some other small changes, the abolition of catch up concessional contributions, a reversal of the relaxation of some deductibility rules for super contributions and so many super funds won't be allowed to borrow.
Peter Switzer: Okay let's look at some industry specific policies, the winners and the losers.
Paul Rickard: Yeah let's start with the health field and there's probably a couple of things here. First of all, the IOP has said that it will put a 2% cap on increases in health insurance premiums. Now that's believed could have a negative impact on companies such as Medibank and NIB, the two listed private health insurers. It also could impact the private health operators, Ramsey and Health Scope, because they rely largely on the private health insurers to pay the bill. There might be a bit of cost pressure placed on them in terms of we can't increase our premiums, we're not going to be able to pay you as much for the treatment.
Paul Rickard: So a little bit of negativity for our leading health insurers and private hospital operators. On the flip side, if the suggestion is that health spending might increase, maybe you might see a boost to the Medicare rebates and some demand stimulus. That could perhaps be a positive for companies. The primary old healthcare, maybe even Sonic healthcare. Obviously a big impact or potential is in terms of the energy space. We know that the IOP's got a policy that supports-
Peter Switzer: Renewals.
Paul Rickard: Renewable energies. So that could help companies. Also could perhaps place pressure on some of the more traditional operators in that space such as AGL and Origin.
Peter Switzer: Paul, you do say moving ahead of the election and then presuming these policies get through, could be a mistake.
Paul Rickard: Well it could be peter for two reasons. One, some of them could be repriced into the market. But secondly, they're all subject in most cases to legislation. We've seen in terms of strain on parliament what has been in the last several governments a senate where the government did haven't a majority in the senate. Sometimes the changes that governments talk about, what they say they're going to do and what the law becomes are very, very different. So I think caution is required.
Peter Switzer: Yeah good point. That's Switzer Investing Insights, brought to you by Nabtrade thanks for joining us.