Government under fire over Budget tax changes

The Federal Budget cut to the tax deduction rate for new investments in capital protected loan products has brought sales to a crawl in the normally busy peak tax planning period, incurring the wrath of the industry.

Planners, suppliers and industry bodies have slammed the cut from 14.55 to 9.25 per cent for claims on loan interest payments for potentially undermining the products as a tax planning and investment vehicle.

Last year, capital protection equity loans comprised an estimated 8 per cent ($2.8 billion) of the $37.8 billion margin lending market.

Neville Ward Advice financial planner Neil Gearside said clients are “much less interested in buying these products than normally at this time of year, which is the high point of the tax planning season”.

“This is simply because the tax deductions our clients can get from these products will be significantly less than before the cut,” he told Money Management.

“Some institutions charge interest on these products of about 19.5 per cent, which is a huge difference to make up between interest charged on loans and the new tax deduction of 9.25 per cent.”

He added that the cut had “made such a big difference to the viability of capital protected lending products that we probably won’t be using them anymore”.

“The product providers might say otherwise, but our experience is that these products represent a much less compelling story for our clients since Budget night this year.”

Westpac head of sales and distribution Craig Keary said there “has been a slowdown without any doubt” in sales of its protected equity loans — although Westpac is still doing deals.

“You will always have that sales slowdown when there’s a shock to the system — and this cut came as a complete surprise — which takes some time to work through to the end-clients.

“However, we think people are now starting to look at the long-term break-even amounts for these products and finding that it’s still favourable in the medium to long-term.

“Certainly, the cut makes it more unattractive for one-year trades, but I don’t think this is the case for three to five year trades,” he said.

Association of Financial Markets of Australia executive director Duncan Fairweather described the cut as a “bit of a perverse outcome, given the current circumstances in the market”.

“At a time when government regulators are concerned about investor risk in the market, the Government has made a risk free product range less attractive to investors,” he said.

The group, which represents the suppliers of capital protected products, is lobbying the Government on the issue, Fairweather said.