When to punt on a tax reform reversal

Labor’s tax reforms are proving a real lesson in unintended consequences. I’ve never seen so many journalists learn to use Microsoft Excel.

Each one is busy coming up with their own bizarre tax scenario. An investor with marginal tax rates of 50%…60%…112%.

Not since 2020 have models caused so much alarm to those who actually believe in them.

As I’ve said before, the tax reforms are just a bailout for the accounting industry.

It’s been plagued by scandals recently. Many of which involved the government.

And so the politicians have thrown their favourite consultants a bone. The need for every wealthy Australian family to upend their tax structure.

It’ll bring in billions in accounting and legal fees. More than enough to pay for the whopping government fines coming for the big four accounting firms.

But did the tax reforms go too far?

Investors aren’t just changing how they invest. They’re changing what they invest in too.

Shareholders are reportedly piling into income stocks with franking credits. They are the last tax-efficient investment in the country. As though the government won’t target that ‘unfair’ loophole next, triggering another rout.

The changes to property taxes and lending may even have popped the indestructible Australian housing bubble!

Can you imagine the derision reserved for those who get the blame? They’ll have to get their post-political cushy job overseas instead of in the country they brought to its knees.

But if the new tax really is as bad as journalists tell us…is it actually a good thing?

Will it create a buying opportunity for investors to get on the property escalator?

Will asset prices recover fast once the tax reforms are simply reversed?

History offers no shortage
of reversed tax reforms

Heck, the last few weeks have seen plenty of Labor U-turns already!

But let’s go back a bit further in time to get a feel for the tradition of reversing tax policy…

England got rid of its window tax and hearth tax after people bricked up the only source of air and light into their rooms and hid their fireplaces.

Then there were the Corn Laws and salt taxes in France and India. These caused so much chaos they were eventually abandoned.

The Smoot-Hawley tariffs were a tax that got unwound after being blamed for the Great Depression.

My own favourite is the Hair Powder Tax. It got rid of powdered whigs practically overnight in 1795. Avoidance was so stark that they forgot to get rid of the tax for 70 years!

A little more recently Sweden, France, Germany and Austria abandoned their wealth taxes. And the UK got rid of its 98% tax on investment income because of serious evasion.

So, perhaps we only need to wait a few years for things to go back to sanity.

And perhaps we should be soaking up plunging investments in the meantime?

Don’t assume we’re going
back to the old system

The next election is pencilled in for…whenever Anthony Albanese’s dinner function attendees request it, I suppose. But before May 2028.

That’s a long time to wait for a reversal in tax policy. And it’s not even clear who his challenger will be.

Australia looks likely to emulate the UK in electing a seriously unpopular Labor government because of a split in the right. Then we could be stuck with these taxes for many more years.

It’s also not clear whether unwinding the reforms would take us back to the old system…or something new.

Here’s what we do know. Financial markets price in the future. They don’t wait for politicians to announce what they’ll do. Nor do they wait for election outcomes.

If you believe the country will reverse the recent tax reforms, you’d have to make your move before the market figures it out.

When?

Maybe that’s the wrong question to ask…

Investing for tax efficiency
always backfires eventually

Right now, wealthy Australian families are pulling their hair out over how to restructure their wealth. Their tax accountants are circling like sharks.

But what if the bigger lesson is that tax policy changes too often to make it worth focusing on?

I see this often with people who move overseas to escape high-tax countries. They quickly discover what they left behind matters more than the tax discount.

Not to mention that the promise of lower taxes often falls apart in the country they move to. Laws change everywhere.

I expect this regret will come for the investors piling into dividend stocks for their franking credits today. The government will simply move the goalposts there next. And investment strategies will have to be realigned again.

Perhaps you should spend your time focusing on what you’re investing in instead of how tax efficient it is. Try to make yourself wealthy instead of your tax accountant.

Then you might go on to discover opportunities so momentous that they make your attempts to achieve tax efficiency look like a waste of time.