The investment implications of a change in government

After a few very intense days inside the halls of Parliament House in Canberra, the leadership crisis is over, at least for the moment.

Scott Morrison is now the newest Prime Minister of Australia. But there's no doubt the Coalition government is still under pressure.

I don't claim to be an expert on Australian voting patterns, and who knows which way things will go at the next election? What is clear though is that the Coalition and the Australian Labor Party have very different policies, and there are three very obvious investment implications if a Labor government were to be elected.

We already know of a number of proposed investment policies that have been announced by the ALP, and if passed as legislation in Parliament they would have significant implications, not just for investors but for all Australians. In combination, they are bad news for the housing market and bank shares.

ALP's attack on franking credits

The first is that if you have a cash refund from franking credits, you are not going to receive the money. I think this ALP policy is the biggest chance the Coalition has of at least making the election close, but they have so far shown no understanding of the implications of what the ALP is doing.

This measure hits people who are not on government pensions and so have pension mode superannuation money of between around $800,000 (that is an approximation, because it depends on your asset status) and $1.6 million.

Once you have substantially more than $1.6 million, your fund is taxable on the excess amount. You will likely have a variety of other investments, many of which will have taxable income. So if there is no cash refund from franking credits, the tax payable will offset the franking credits and you won't be trapped.

Of course, if you are in a self-managed pension model fund with investments above $1.6 million that are concentrated on investments carrying franking credits, then you would miss out. But that's a foolish investment strategy, so I think a vast majority of people with superannuation pension mode funds above $1.6 million will be too smart to be caught.

But there are a vast number of Australians who are self-funded in pension mode with assets just above the government level and approaching the $1.6 million where tax-free status ends – that's the ALP target.

It is a rotten policy and I don't think it is going to raise a lot of money, but that is another subject. And so the instructions are clear; if you have substantially more than $1.6 million in your portfolio make sure you are not caught. If you are in the dark zone, then you need to look closely at your situation. You many need to bring children into your fund, because they will have taxable income to offset the franking credits in your fund.

Essentially, that is how the industry and retail funds can escape the ALP measures. If you don't want to bring children into your fund or they don't have enough money in their superannuation fund you may consider the sort of products that will emerge from large superannuation funds enticing pension mode self-managed funds to forego their independence.

As we get closer to the trigger point of July 1, 2019 it is possible that specialised securities may be offered by the big superannuation funds, which will see them manage the equity content of a self-managed fund. If you are vulnerable on this front you don't have to take action now, but you must prepare yourself.

ALP's attack on negative gearing

The second major change is in negative gearing, where the ALP says that you are only able to negative gear properties that you build and not those that you buy from an existing owner.

That means that for investment purposes pre-owned dwellings are worth a great deal less as an investment. First, you cannot depreciate a pre-owned dwelling and now under ALP policy you can't negatively gear it.

There is already a significant value difference between an existing pre-owned dwelling and one being built by an investor because of depreciation. An ALP government will considerably widen that gap by removing the ability to negatively gear. That means you have important decisions to make. Your first inclination might be to buy an existing pre-owned dwelling before the ALP gets into office so that you can negatively gear.

But if you do that you must understand that if you want to sell the dwelling, any buyer will not be able to depreciate or claim negative gearing. All other things being equal (and they normally aren't) the value of the property will decline.

If you are buying a dwelling, be aware of these forces. It won't stop you buying a unique and superb dwelling, but you must beware of buying generic apartments or low-cost houses.

Wages, housing and rates

Thirdly the ALP will have policies that will tend to push wage rates higher. There will be substantial large corporate cost-cutting, but I think there is a reasonable chance that our inflation rate will rise under an ALP government.

Reserve Bank Governor Phillip Lowe this week warned about the possibility of higher interest rates stemming from the United States. An ALP government might fan that trend. So you need to be aware of the dangers in the housing market.

At the moment dwellings are drifting in price in most areas because of the bank credit squeeze. In coming months a combination of overseas higher rates and the threat of an ALP government might create a fear that continues the downturn. But I don't think we are looking at a collapse, unless there is a very big crisis overseas or in Australia.

Meanwhile, the Coalition is going to be in no hurry to go to the polls, so I wouldn't expect an election until well into the second half of 2019 unless, of course, the Coalition actually implodes. The last possible date for a House of Representatives election is November 2, 2019.

The world has always looked to Australia as a stable place, but our stability has been weakened by the current government's gymnastics, particularly as it follows a similar set of gymnastics from Gillard and Rudd.

The danger is that people who lend money to Australia may want a higher rate to cover the fact that we now have a less stable government than when John Howard and Bob Hawke were in charge.

And this is not good for the share market, particularly as five of our top 10 stocks are banks and three of them are in crisis as a result of mistakes.

Of course, on the dwelling investment front, the bottom line is there will be less houses for rent and over time rents will rise and again over time that will push house prices higher. But it is a long-term situation. When renters discover that they are being punished by the negative gearing legislation the ALP will then realise the consequences of their actions.

It's a case that it was good policy at the last election, but the game has changed.