Eco Investor August 2019
An Open Letter to the Labor Party
By Victor Bivell
Dear Mr Albanese,
I am a long time swinging voter and am writing to discuss how I believe the Labor Party should redesign its policies on negative gearing and franking credits. These policies were much discussed during the recent Federal election and the failure of the Labor Party to win the election has put back much needed reform in these areas, possibly for considerable time. It is therefore crucial that the updates to the Labor Party's policies are formulated to maximize public acceptance while achieving the best outcomes for the Budget and for equity.
I believe the reformulated policies should be based on at least three
On negative gearing, I believe it was an error of the previous policy to remove negative gearing for established homes and to focus only on new homes. Negative gearing has more benefits than providing rental accommodation and supporting the construction of new homes. Among these, negative gearing is a national savings mechanism, it can lead to positive gearing and financial independence, and it helps to get people off the pension. These benefits were ignored or not appreciated by the Labor Party in the formulation of the previous policy and discussion of these by Labor was absent during the election campaign.
The attraction of negative gearing as a savings mechanism should not be underestimated nor undervalued. As property is a favored asset class for a significant percentage of the population, it readily lends itself to government policies that encourage saving. However, investing in new properties and off-the-plan properties introduces numerous construction and other risks, as seen recently by the growing number of apartment blocks in Sydney that have had to be evacuated. This is why investing in established properties suits small and conservative investors. It is lower risk. It also makes it easier for people to invest in locations that suit them, rather than in areas that are further away, in distant growth areas, or where developments happen to occur. So negative gearing for established properties should be maintained, and its virtues respected.
To encourage positive gearing, financial independence and helping people
to get off the pension, there are many policy ideas that can be looked
at. These include:
Numerous organizations such as the Treasury, Productivity Commission, independent think tanks, economic consultants and others are well placed to examine how this can best be done, and to encourage public discussion.
On the question of how to remove excessive benefits from negative gearing,
there are many options to control the deductibility of negative gearing
costs as well as a large body of literature that discusses the numerous
methods used by governments around the world. Some of the mechanisms available
The method or methods chosen should remove excessive benefits for large investors while encouraging small investors to aim for positive gearing and then full ownership. This approach will fulfil the objectives of improving the Budget, social fairness, and affordability for first home buyers. Changes to negative gearing should also be presented as a pathway to increase the number of people who can be financially independent and to reduce the number of people who rely on the pension. These are benefits that will be welcomed by most Australians.
On franking credits, the policy that Labor took to the last election did not meet the key principles of encouraging financial independence, looking after the little guy while removing excessive benefits for the big guy, and incremental rather than dramatic changes. Furthermore, announcing such a policy from opposition - rather than from government and after a public debate to gauge public sentiment - was poor political management.
Labor's main argument, that franking credits that do not offset payable tax are a "gift", is not the complete picture. Yes, these franking credits are a gift, but they also have uses and benefits. They are easier to administer and with far less bureaucracy than the pension or part pension, they encourage financial literacy as they encourage people to take an interest in the management of their financial affairs, and they encourage people to aspire to and to achieve financial independence. These are valuable benefits that were ignored by the policy.
Like many Australians, I believe the simplest and best way to limit excessive franking credit refunds is to put a cap on the amount that each person can receive.
What that cap should be is a good question for public discussion.
My own view is that somewhere around $10,000 to $15,000 per year is reasonable and fair. This is because it would accommodate those many investors whose main assets are a portfolio of fully franked shares. At a cap of $10,000 such people would have a total investment income of $33,333 per year including $23,333 in dividends. At $15,000 such people would have a total investment income of $50,000 per year including $35,000 in dividends.
This income band is above the pension so it would encourage saving and financial independence. For people whose assets are around or only marginally above the pension assets limit, it would be a more efficient form of payment than forcing them onto a part pension. It is high enough not to affect the majority of dividend receivers, making its acceptance politically easier. It is low enough to remove excessive and massive refunds in the many tens of thousands and hundreds of thousands of dollars. This band would remove enough of the excess in the system to both benefit the budget and improve equity.
A cap also has the advantage that it gives future governments the flexibility to change the cap as needed by then fiscal or political circumstances.
Another idea may be to allow franking credits up to a certain level, say $5,000 to $10,000, to be contributed directly to superannuation in lieu of cash where the investor's superannuation account is modest, say less than $500,000. This would also assist full time care givers and non-working spouses. This could be in addition to the cap, or part of the cap if other inducements were available for investors to choose this option.
I trust these ideas are of interest and hope they contribute to your reformulation of policies in these important areas.
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