16 NEWCASTLE HERALD Thursday, July 30, 2015

business PERSONALFINANCE

Tax reformsposequandary

Noel Whittaker is the author ofMaking Money Made Simple andnumerous other books on personalfinance. His advice is general innature and readers should seektheir own professional advicebefore making any decisions.Email: noelwhit@gmail.com.

Tax revenue needs to rise,

but is any one option

preferable?NOELWHITTAKER

Tax reform is back on the agenda,with the usual suspects establishingtheir positions. This week ACTUhead Ged Kearney took a strongposition against widening the GST,calling for a higher Medicare levy, areview of negative gearing andincreased taxes on superannuation.The employer groups respondedwith a call for a cut in company taxand the abolition of payroll tax.

Obviously any change will bevigorously opposed by one group oranother. But the reality is thatmassive revenue shortfalls arelooming, and this has hugeimplications for healthcare as thepopulation ages. Today, in theinterests of an informed debate, let’slook at the implications of the majorchanges being discussed.

Any changes in GST will beattacked as regressive, which meansthey hit the poorest the hardest, butthat criticism can be applied to anybuilt-in tax. The classic examplesnow are petrol tax and excise onliquor and cigarettes, which are all

regressive. A major benefit of GST isthat it’s almost impossible to avoid,and is a great way of getting a chunkof the money that is circulating inthe cash economy. While it may hurtlow-income earners most, it actuallyhits high spenders the hardest, asthey are the ones with the largestdisposable income.

A call for a rise in the Medicarelevy from 2 per cent to 4 per cent isjust another way of asking for anincrease in marginal tax rates. Themoney raised by the Medicare levynow is not all spent on Medicare – inthe interests of transparency theterm ‘‘Medicare levy’’ should beabolished and incorporated in thecurrent tax rates.

It isridiculoustobecallingforariseinmarginaltaxrateswhenoneofthebiggestchallengesforemployeesisbracketcreep.Andhighertaxratesmakeitmoreattractiveforhighearnerstonegativegearforinvestment,asthegovernmentsubsidisesmoreoftheshortfall thanitdoesforlowerincomeearners.

The Henry Review called onstates to replace stamp duty with aland tax on every property. Thereasoning was that stamp duty is anunreliable source of revenue, as itis dependent on booms and busts,and is also an impediment tomoving. The ACT liked the conceptso much that they’ve alreadyimplemented it – well, at leastpartly. They’ve introduced land taxon the family home, but youguessed it, have retained stampduty. There have been numerous

reports in the press about protestsby Canberra home owners who’veseen their cost of home ownershiprise more than 40 per cent.

The problem with universal landtax is that it takes no account ofability to pay, and hits hardest onretirees who are asset rich andcash poor. The offer of the ACTgovernment to treat outstandingland tax like a HECS debt –capitalise it with repayment duewhen the house is sold – has notbeen well received.

Expect to see death duties backon the agenda, but there is littlelikelihood that they will beimplemented. You can’t have deathduties without gift duties, as olderpeople could simply give theirassets away to avoid death dutiesand, in any event, we have de factodeath duties now.

Although death does not triggercapital gains tax, the beneficiariesare liable for capital gains tax onbequeathed assets as soon as theysell them.

Also, there is a tax of 17 per centnow on the taxable proportion ofyour superannuation that is left toa non-dependant.

The lack of consensus at thisweek’s premiers’ tax retreat showshow difficult reform will be, but atleast a decent debate is starting.

It is long overdue.

Q We have a weekender which weuse regularly, which is not rented

out. Can we use this as our primaryresidence for tax purposes?

A If you intend to use the property asyour primary residence for tax

purposes, you will need to be living init. Evidence of residence includeshaving your mail sent there, and theproperty being your address forelectoral roll purposes. Once you haveestablished it as your main residenceyou can move out and continue tocover it with your main residenceexemption indefinitely providing itdoesn’t earn income.

Q I am 57, retired on a small PSSpension, and own two investment

properties as well as my own home. Iam considering selling an investmentproperty to free up some cash. If I selland start up a super fund with theproceeds, how will that affect my capitalgains tax? Will I be taxed differently if themoney is inside a super fund or outside?

A The earnings within a super fund area flat 15 per cent, whereas earnings

in your name will be taxed at personaltax rates. Your accountant should beable to do the calculations for you, andhelp you decide what would be the bestentity to own the asset.

Big banks’ shares remain attractive to investors

Big banks are the pillars of superfund trustees’ share portfolios.

By JOHN COLLETT

WHEN considering the tremendousincrease in per capita wealth overthe past couple of decades it is littlewonder that the managers of wealth,the big banks, have done so well.

They have been able to make themost of the deregulation of thefinancial system over that timewithout losing much market share tocompetitors.

Little wonder the big banksremain the mainstay of DIY superfund trustees’ share portfolios.

It is not only their tax-effectivedividends when compared with thelow rates that can be earned on cashthat make bank shares attractive.Their share-price performanceshave been good as well.

Analysis by CommSec shows that20 years ago the big four banks wereranked in the top 10 ASX-listedcompanies by market capitalisation.They now occupy the first fourplaces. Twenty years ago there werethree mining companies in the top10. Now, only one miner, BHPBilliton, remains; though 20 yearsago it was BHP, which merged withBilliton in 2001.

While the average wage has morethan doubled over the past 20 years,per capita wealth has more thantripled from $97,000 in 1995 to morethan $340,000 now. That is mostly dueto the performances of shares andproperty. The median dwelling pricenationally stands at almost $500,000,compared with about $130,000 in1995.

The S&P/ASX 200 Index is nowabout 5500 points compared withalmost 2000 points 20 years ago.When the dividends are included,the total returns from Australianshares are much greater.

Assuming that over the past20 years all dividends wereploughed back into the market, theinvestment would have grownsixfold.

I would not worry too much aboutthe higher capital requirements thatthe Australian PrudentialRegulation Authority is imposing onthe big banks. It is part of thecrackdown by regulators worldwideafter the experiences of the GFCwhen banks in the US and Europewere bailed out by taxpayers.

The extra capital the banks will

need is huge, about $11 billionacross the big four. But the banks aremuch bigger with combinedcapitalisation of about $420 billionand combined annual profits of

more than $30 billion.Among the capital management

levers they could press, the bankscould slow the growth of theirdividends. But it is bank customerswho are likely to be making a majorcontribution. That can be achievedby not passing on any future cash-rate cuts in full to mortgage holders.And when interest rates do start torise, the banks may not pass on thehigher cash rates in full to theirdepositors. That is what you can getaway with when you dominate anindustry sector.

The only trouble for the banks’shareholders would occur if therewas a marked slowdown in thebanks’ revenue growth. While thereare signs credit growth is slowing, itis likely to remain at healthy levels.