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Four way investors can beat the Federal Budget

While much of the financial commentary is currently focused on the May 1st RBA Board Meeting, there’s another big event 7 days hence that can have a much more significantly long-term impact on your wealth.

I am, of course, referring to the federal Budget.

Budgets past have bought us a Goods and Services Tax, numerous tax cuts and hikes and impactful policy initiatives such as Medicare and the higher education loans scheme known originally as HECS/HELP.

Investment returns on the line

Changes in government policy can also have a meaningful impact on investment returns – both positive and negative. The three most significant changes in the past few decades include the introduction of capital gains tax, negative gearing and dividend imputation (known colloquially as ‘franking’) which removed the double taxation of earnings.

Superannuation has also been a popular play-toy for successive governments, with each seemingly unable to keep their hands off the super system for long, playing with tax rates and voluntary contribution limits. It’s enough to make your head spin, but has certainly provided a steady stream of work for superannuation advisors.

Which takes us nicely to the 2012 Federal Budget.

Trying to guess the budget changes in advance is like trying to pick five RBA decisions all at once – some of the ideas are telegraphed (or leaked) in advance, and others come right out of the blue.

What we do know is that politically at least, this government is committed to a budget surplus in the 2012/13 financial year. Part of that will be a desperately hoped-for recovery in corporate profits in general, and mining profits in particular, but the government will be looking for significant savings.

Changes in super

One area that has been targeted in pre-budget speculation is the aforementioned superannuation system. Media reports recently suggested that the government was looking to increase the tax paid on superannuation contributions by high-income earners. Currently, those contributions are taxed at 15%, compared to 45% (plus Medicare and Flood Levies) for the highest income earners.

Ominously, the Greens’ political platform calls for a progressive scale of taxation on super contributions, which will be an important consideration for a minority government that has to navigate two houses of parliament without guaranteed passage in either.

With tax cuts unlikely (at least without offsetting increases elsewhere), the government has less ammunition than in some previous years to stimulate the economy. With the ‘hip pocket nerve’ being particularly sensitive as we approach an election, the government is keen to increase the feeling of wealth in the electorate.

Talking up the economy

To that end, we’ve seen the federal government jawboning both the RBA and the large banks to keep interest rates low. Treasurer Wayne Swan must be thoroughly sick of fronting the media each time a bank either increases rates or fails to pass rate cuts on in full. The media battleground has changed slightly in the past few weeks as an RBA cut becomes more likely, with the government claiming credit for giving the RBA ‘room to move’ to cut rates.

In either event, while not a budget action per se, lower rates will make a lower Australian dollar more likely than not. A lower dollar is good news for Australian exporters, but will lift prices of imported products. It will also improve the bottom line of Australian companies who have businesses overseas (and particularly in the US) such as QBE insurance (ASX: QBE), Westfield Group (ASX: WDC) and Cochlear (ASX: COH).
If the history of budget announcements teaches us anything, it’s (somewhat contrarily) that they really don’t -- or shouldn’t -- have that much impact on how you invest. Investing purely for tax benefits is rarely a profitable endeavour, as Timbercorp investors now know, and at the end of the day, you only get taxed if you make a profit.

We can all wish for lower taxation, but it would be foolhardy in the extreme to cut off a profitable nose just to spite your tax-averse face.

Foolish bottom line

Rather than fret about what the budget may or may not bring in terms of tax, instead consider doing the following...

1.    Do nothing. If you really are looking to minimise tax and other costs (and there’s no point paying more than you have to) try doing nothing – literally. Longer holding periods will reduce your tax burden and significantly reduce trading costs.

2.    Focus on the long term. Control the ‘controllables’ of your emotions, company selection and paying a reasonable price.

3.    Save and invest regularly. Reinvest your dividends and watch for meaningful changes in company performance that are likely to have long term effects.

4.    Time and compound interest are your friends – frenetic trading and ‘the next big thing’ are your enemies. Keep that in mind, ignore the short-term noise – even from Federal Budgets -- and you’ll be glad you did.

The ASX is already on the move in 2012, and Goldman Sachs experts recently said they reckon S&P/ASX 200 could top 5,000 next year. Read This Before The Coming Market Rally is a must-read for investors who don’t want to miss out on the party. Click here now to request your free copy, before it’s too late

The Motley Fool's purpose is to help the world invest, better. Take Stock is The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it's still available. This article contains general investment advice only (under AFSL 400691).