Introduction

Labor’s proposed tax policiesBy Sam Hunt

Political pundits have picked May 2019 as the most likely date for the next Federal election. The November Newspoll had Labor leading the Coalition 55% to 45% on a two-party preferred basis. With a Labor victory a strong possibility, I have reviewed five of their key proposed tax policies and the potential impact.

Labor’s proposed tax policies By Sam Hunt

Sam Hunt

Political pundits have picked May 2019 as the most likely date for the next Federal election. The newspolls have Labor leading the Coalition 55% to 45% on a two-party preferred basis.  With a Labor victory a strong possibility, I have reviewed five of their key proposed tax policies and the potential impact.

  1. Capital Gains Tax (CGT)

Capital gains can be offset against previously incurred but unused (carried over) capital losses and against losses incurrent that financial year.  Individuals and trusts are entitled to a 50% discount on the capital gain amount from a disposed investment asset providing they held the asset for more than one year.

Labor proposes to halve the CGT discount to 25% for all assets purchased after a ‘To Be Confirmed’ (TBC) date following the next election for assets held for over a year.

Some of exceptions (for which the current rules will still apply) are:

  • Investments made before the TBC date
  • Investments made by superannuation funds
  • Assets of “small business” owners

Example

  • John is a surgeon with an assessible income of $500,000 per annum from public and private practice
  • He purchased an $800,000 investment property in his own name over 12 months ago which was sold for $1.6 million

Current

  • $800,000 capital gain less 50% discount = $400,000 assessible gain
  • $188,000 tax liability (inc. medicare levy)

Proposed

  • $800,000 capital gain less 25% discount = $600,000 assessible gain
  • $282,000 tax liability (inc. medicare levy)

Outcome:   $94,000 additional tax liability

2. Negative Gearing

Negative gearing is where investment related expenses (mainly borrowing costs) exceed investment income and the loss is claimed as a tax deduction against other income such as salary or business income.

Labor proposes to limit negative gearing to ‘new’ housing from a date TBC after the next election with investments made before this date grandfathered.

Some of the exceptions (for which the current rules will still apply) are:

  • Losses from ‘existing’ properties will still be able to be offset. These losses can also continue to be carried forward to offset the final capital gain on investment.
  • Investment related expenses (including borrowing) for investments in shares will still be available to offset.

Example

  • Sophie is a barrister with gross income of $500,000 per annum taxable income from her practice.
  • She purchases a pre-existing investment property in her own name, with a gearing loss of $50,000 per annum

Current

  • $450,000 assessible income ($500,000 less $50,000 investment loss)
  • $184,597 tax liability

Proposed

  • $500,000 assessible income
  • $208,097 tax liability

Outcome: $23,500 additional tax liability

3. Changes to discretionary trust arrangements

The trustee of a discretionary trust has the ‘discretion’ to distribute income and capital gains to the beneficiaries of the trust. The distributions received by adult beneficiaries are tax at recipient's marginal tax rate and can provide for tax planning opportunities.

Labor is proposing to apply a minimum standard tax rate of 30% to discretionary trust distributions to adult beneficiaries.

Example

  • Jane is an anaesthetist
  • She is married Bill and they have three adult children
  • The children do not generate assessible income and they have a discretionary family trust which generates $54,000 per annum in income

Current: $0 tax liability if income is split between the adult children

Proposed: $17,280 tax liability

4. Superannuation: non-concessional limits, catch-ups and tax deductibility

The current non-concessional (post-tax) contribution limit is $100,000 per annum. Individuals under age 65 with a superannuation balance less than $1.4 million also have the option to ‘bring-forward’ future non-concessional contributions and contribute up to $300,000 (subject to certain conditions).

Labor has proposed reducing the non-concessional contribution cap to $75,000 per annum. The ‘Bring Forward’ provisions would still apply.

The current concessional (pre-tax) contribution limit is $25,000 per annum. From 1 July 2018, individuals have the option to carry forward their unused concessional contribution cap for up to 5 financial years for use in a future financial year.

Labor is proposing to abolish the ‘carry forward’ concessional contribution provisions.

An additional 15% tax (Division 293) applies to certain concessional contributions made by or on behalf of high income earners to superannuation.

The current high income threshold is $250,000 per annum which Labor has proposed to reduce to $200,000 per annum.

5. Removal of excess imputation credits as cash refunds

Franking Credits also known as Imputation Credits are a type of tax credit that allows Australian Companies to pass on tax paid at the company level to shareholders. The benefits are these franking credits can be used to reduce income tax paid on dividends or potentially be received as a tax refund.

Labor’s policy is that it will deny cash refunds for excess imputation credit, with some exceptions.

Example

  • John & Sophie are both 62 years old and fully retired
  • They have $1 million in their self-managed super fund in pension phase
  • They are fully invested in Australian shares generating a fully franked yield of 4% ($40,000 income plus $17,143 franking credit)

Current: $57,143 tax free income

Proposed: $40,000 tax free income, $17,143 loss of income due to inability to claim excess franking credit

Summary

While these proposals will have negative tax consequences for the majority of our clients, it is important to note that these are only proposals and a lot can happen between now and the next Federal election. Even if Labor wins, the final policies might be modified.  

So what action can be taken now?

  • Build your financial independence without reliance on one particular tax framework;
  • Now, more than ever, diversification across global markets is paramount; and
  • Design your financial and wealth strategy around those you wish to provide for and living your life.

At WARR HUNT, we aim to provide the right combination of structure and flexibility in your financial and wealth strategy to help you cope with policy change.

If you would would like to discuss your strategy further, do not hesitate to contact us on 9935 0970 or at admin@warrhunt.com.au.