It’s Vanguard’s budget wish: tax-free investment accounts for the under-45s
In four-more Tuesdays, it’s the Federal May Budget time! On that Tuesday, May 12, we get to hear the big ideas of those who’d influence Treasurer Jim Chalmers before he signs off on the money game plan for the year. Chalmers has two jobs that will give him a pass or fail on his figuring.
The first is how he cuts his spending. And the second is the calibre of his tax changes where changes to negative gearing and the capital gains discount look like they’ll be high on the agenda.
I maintain with the budget deficit at an estimated $36.8 billion for this financial year, Chalmers will politically target those who are unlikely to vote Labor — business owners, wealthy investors, those with more than one property investment and so on. So, the idea from the managing director of the Aussie division of the world’s largest exchange-traded fund Vanguard Australia might appeal politically to the Treasurer but it might not make economic sense.
Vanguard’s Daniel Shrimski thinks taxpayers under the age of 45 should be given a tax reprieve for the returns made on $20,000 worth of investments to help them save a deposit for a home.
In The Australian Matthew Cranston gives us an idea of just how significant Vanguard is. This US fund manager invests, wait for it, $17.4 trillion worldwide. Consider this to see just how big Vanguard is: the GDP of the USA is US$32 trillion each year, while China’s total production is valued at US$20.6 trillion!
Yes, Vanguard is a big kahuna in the investing world, so the Treasurer won’t rule out a big idea from an organisation that actually pioneered cheaper and more diverse investment products called exchange traded funds or ETFs.
Here’s Shrimski’s plan in more detail:
- A tax-incentivised investment account would be created.
- There’d be no capital gains tax on the returns.
- The money couldn’t be touched for two years.
- The account is capped at $20,000.
- It would cost the budget $540 million a year or $2.7 billion over five years.
Britain, Sweden, Japan, Canada and the US have plans like this to promote home ownership. Behind these measures to boost saving is that too many people are in low-return savings accounts on which they pay high tax rates.
Cranston put the poor savings story into a simple context: “Australians hold 23 per cent of their household financial assets in cash and deposits, yet across the past decade the average annual return from cash has been only 2 per cent.”
He also points out that economists argue that anything that improves the ability for people to buy a property will only fuel house price increases and that the Government must help increase the supply of properties.
Of course, that would mean making the life of builders and developers less taxing, literally. But the size of the deficit and the political goals of the Albanese Government are not on the same page as developers, who risk their money to build properties people could buy.
Given history taught us that governments are hopeless at actually building and managing low-cost housing, the private sector needs incentives to bring more properties to market.
the government would probably rather the young spend all their Super on buying a property so as to continue propping up prices on our appallingly badly managed housing market in this country.
I tell young people if they have a home loan, then put all their savings in an offset. In that way, not only is it tax-free, but effectively get the home loan interest rate on their savings. 🙂