On 18 May, we get the opportunity to elect a new Parliament. The choice is between a Coalition that has governed as a minority and been wracked with factional warfare and leadership instability, and a Labor opposition that has pledged a massive tax and spend agenda.  Along with this agenda they put out heroic and uncosted emissions reduction policies that will result in a multi-billion-dollar transfer of wealth offshore as large companies buy carbon credits, which will enrich a few insiders at a massive cost to the economy and employment with little to no impact on the climate.

We also have a gaggle of both left- and right-wing independents who may have a significant influence over the policies of both major parties if their support is needed.  If so, they will extract a price for their support. There is every chance the next Parliament will be a dog’s breakfast.

The Coalition has become competitive only because of the performance during the campaign of Scott Morrison and Josh Frydenberg; the rest of the front bench might as well have hidden under a rock. The Coalition pledges economic stability, fiscal repair, national security and jobs growth.  It’s probably not up there with JFK level rhetoric, but to the extent that this means getting the big things right and avoiding adventurism in tax and economic policy, then they should get some credit.

The Labor party plays to its base and seeks to expand that base by fomenting dissent, state dependence and envy between elements of society and demographic groups in an unprecedented way. In this endeavour they are urged on by the Greens, who are struggling for relevance and have exposed themselves as at least equally detestable as any right-wing fringe dweller.  They are angling for coalition status with a minority Labor government.

The Stump cannot remember a more bitter and acrimonious campaign.  We put it down to a fracturing of trust in the electorate over the last 12 years, an increase in tribalism given an outlet by the sewer that is social media, and the dominance of what is called the “Political Class”, that is parties and candidates dominated by those who have never had a job in the private sector, let alone risked everything to run a business.

But this blog is about small business; those who are in it, were in it or will go into it, and people who simply value individual rights and freedoms ahead of the dead hand of the State governing their every move.

What are the Labor policies that will hurt these people?  It is a Melbourne Cup field, but here is our big five;

  • Franking Credits – To deny refunds to certain citizens who receive franked dividends but otherwise do not have a taxable income
  • Negative Gearing – To deny the ability to deduct rental losses against other income on existing property purchased after 1st January 2020
  • Capital Gains tax – To reduce the CGT discount on assets held over 12 months from 50% to 25%
  • Taxing of Trusts – A proposal to apply a 30% tax across all trust distributions to “ make them like companies”
  • Borrowing in Super – to ban the use of limited recourse borrowing in SMSF structures

Franking Credits

Dividend imputation literally means that the tax paid by companies is imputed into the tax position of the shareholder. In some cases that means if the shareholder does not have enough taxable income, they get that imputed credit refunded.  This has been a core and bi-partisan position for 20 years. The integrity of this system has become a cornerstone of equity markets, private company distributions and retirement planning. In this country we have a pure system of imputation and it is the most attractive feature of the overall tax system because it is self-balancing. If company tax rates stay high then franking credits are high; if company tax rates fall, franking credits fall. The argument that it is not sustainable is arrant nonsense. But worse than that, Bill Shorten has resorted to demonising recipients of those credits and misrepresenting the nature of the system to defend the indefensible.  He calls them a gift which is an insult to the shareholders and a lie.

The policy to deny refunds to those entitled to them is naked discrimination against retirees, low income earners who own shares, and SMSF members.  Tax exempt bodies including trade unions will still get refunds and members of industry super funds will have their crediting rates maintained because the tax payable on contributions by accumulation members will absorb the excess credits.  This position is untenable and will certainly be the subject of a legal challenge.

Negative Gearing

The motivation here is to diminish the presence of investors in the market for established property to ease the path for first home buyers.  There is not universal hostility to the motivation here, other than that the market in the last two years is doing that job for them. Nationally there is a buyers’ market and has been for two years. Why intervene? Who wants to buy a home only to see prices keep falling because of poorly timed policy?

Today, Chris Bowen the shadow Treasurer and architect of this policy is in the media telling first home buyers it is not a problem if they find themselves in negative equity because the value of their house has fallen – this is a ridiculous proposition. Negative equity is a financial trap that can imprison a person financially for years and can result in a bank repossession if the person loses their job. Chris Bowen could not get a job as a financial adviser, yet he might be Treasurer.

The law of unintended consequences applies here as was shown in 1989 when another Labor government did the same thing only to reverse it when rents sky rocketed, and housing supply dried up. Once again as the foundation for this policy unravels we see Bill Shorten demonising property investors as rich fats cats sitting on their yachts with 6 rental properties under their belt. Research shows this to be a very unfair stereotype.

Capital Gains Tax

It is another ‘fat cat’ argument by Bill Shorten. But the point is this – capital is accumulated on an after-tax basis. Only when income is earned and taxed can it be re-invested as capital to assist economic growth, employment and profits which will in turn also be taxed. Is there not a justification for a lighter tax regime on capital given its role in creating growth and income? We have seen the so-called cost to the revenue of this concession, but where is the analysis on the economic benefits of allowing more of the capital gains to return to the real economy? We have not seen that. Instead it goes to the government to disappear down the fiscal black hole.

Taxing of Trusts

An area that has achieved mythical status in the minds of politicians who really have no idea of the role of trusts and the extent to which they are used to minimise tax. The worst thing here is the total absence of detail. Is the tax a withholding, to be credited to the beneficiary and refunded if it turns out to be too high? Will that also be a ‘gift’ like imputed dividends? Who would know?

Where is the evidence that tax is evaded through trusts? The Stump is more worried about multinational tech companies shifting mega billions to tax havens and self-selecting their tax bills. They pay just enough so their own customers are not revolted by them. This proposal as others before it, is likely to founder on the implementation and at the very least be watered down radically and in the process it will elevate anxiety and concern in family arrangements, but raise in the end minimal revenue; another hit on the small end of town.

Super Fund Borrowing

In this case, Labor is like the army walking on the field after the battle and bayoneting the wounded. We say this because it is still legal to use a limited recourse loan in an SMSF structure to buy property, but after the banking scandals, it is all but impossible to get one. This is even though when it comes to the ability to use a SMSF to purchase business premises for an SME rather than rent, it is unsurpassed as a long-term wealth creation opportunity. The entry of residential property marketeers into this sector a few years ago sparked the death knell, but there is no reason at all why it should not remain possible in the case of business real property, which was its original intention.

Summary

The Stump says that in the real world there can only be one choice and that is a vote against these draconian policies that will throttle and stifle small business. Any person in a small business or who relies on a small business for their income should bear this in mind. Forget the leadership changes, Lord Waffles of Wentworth (Malcolm Turnbull) does not need your sympathy; he is quite ok thanks very much. Forget the personalities, look at the policies. Do not be beguiled by the Utopian dream that taking money from retirees will make you better off. Go for the policies that will impinge on your entrepreneurial efforts the least and help to grow the economic pie rather than carve it up in a different way.

Best Wishes

-Jim Wheeler