New playing field for investment
With the election outcome settled, investors can plan ahead with greater certainty, at least until the next election. For younger and even middle-aged taxpayers, accumulating large amounts in super will be much more difficult even if the budget measures to restrict non-concessional super contributions are modified.
The main beneficiaries of the super tax concessions are now the fortunate few in generous defined benefit employer funds and those with large amounts in super already.
With super's major drawback being money untouchable until retirement age, voluntary super contributions including via salary sacrifice will be far less attractive when the concessional and non-concessional contributions caps are lowered in 2017.
The rejection of Labor's proposal to increase capital gains tax and limit negative gearing tax deductions leaves geared investments in personal names and outright family home ownership as the two most tax effective savings options. Both of these strategies are extremely low cost and simple to implement and most importantly, they're flexible if personal circumstances change.
Savings used to reduce an owner-occupied mortgage can easily be accessed via withdrawals from a mortgage offset account using redraw facilities. While not necessarily ideal, geared transactions can similarly be reduced or reversed via sale of part or all of the investment.
In the meantime, individuals with both owner-occupied mortgages and investment loans can reduce their tax bills and build wealth by focusing on paying off the owner-occupied mortgage. Doing this has multiple benefits, often overlooked because of a natural desire to reduce personal indebtedness.
But given the complete deductibility of all investment expenses including interest payments, reducing investment debt only increases personal tax liabilities at the relevant marginal tax rate. There's no similar adverse tax impact from reducing an owner-occupied mortgage because Australia doesn't provide a tax deduction for interest paid on personal mortgages.
Older taxpayers with spare capacity under the new tougher rules to contribute to super can also protect their personal tax situation by contributing more to super.
In planning future investment strategies, the key consideration is knowing that the same investments can be owned inside and outside superannuation.
Given that the tax advantages of gearing are far greater outside super, the latest crackdown on the generosity of the super tax concessions will refocus attention on geared portfolios in personal names.
While the ultimate capital gains tax liabilities on assets accumulated outside super may be higher than on super fund assets, the liability can be successfully managed by deferring asset sales.