With the next Federal election rapidly approaching many clients have asked us to explain the likely tax changes if there is a change of government. Labor has announced it will introduce a number of significant tax changes should they be elected and we think it is important that people are able to understand the proposed changes. This bulletin outlines the changes that have been announced.
Unfortunately details on many of the proposals are limited and we can only speculate on some of the ways in which these changes will operate. Nevertheless, taxpayers should be considering the possible implications of these proposed changes. Our advice is that investment decisions should not be made solely on the basis of tax. Although likely (if we are to believe polls and the betting odds), it is not certain that the ALP will win the next election. Even if Labor does form government, it is unlikely it will control the Senate. Therefore it will still be dependent on support of the minor parties and independents as to whether these proposed tax measures are legislated.
Currently capital gains on assets sold by individuals are entitled to a 50% discount provided the asset has been held for more than 12 months. Consequently only half of the gain is subject to tax. Capital gain derived by trusts and distributed to individuals also receive this discount.
Labor intends to reduce this discount to 25%. Therefore, 75% of any capital gain will be taxed.
The change will apply to assets acquired after a yet to be determined date. Any assets acquired prior to this date will still be entitled to the 50% discount. The 50% discount will also remain available for “small business assets” although this term is not used in tax legislation. We assume this is intended to mean that small businesses with < $2m in turnover will still be able to access the current Small Business CGT Concessions. It is unclear how this will apply to the Small Business CGT Concessions where the relevant business has turnover > $2m.
At the moment the maximum rate of tax (including Medicare) paid on capital gains derived from assets held for more than 12 months is 23.5%. Under Labor’s proposal this will increase to 36.75% including the reintroduction of the budget relief levy.
There will be no change to the one third discount available to superannuation funds.
Labor has stated it will limit negative gearing to new residential properties only. The changes are not retrospective but will apply from a yet to be determined date. Losses arising from other property and shares will not be able to be offset against salary and wage income, but they will be able to be used to reduce tax liabilities arising from investment income.
There are many unanswered questions around how this policy will actually be implemented:
Can a loss on one negatively geared asset be offset against the net income on a positively geared asset? (likely to be the case if both assets are acquired post law changes)
Can losses on a negatively geared asset be carried forward to be offset against profits from the same asset or a group of assets in future years? (Unlikely as the Labor policy states that losses may be carried forward to offset the final capital gain. No mention is made of offset against future profits generated by those properties.)
If losses cannot be carried forward, will they form part of the cost base of the asset and so reduce the capital gain on a future sale? (Likely)
What is meant by “new residential property”?
Labor intends to introduce a minimum 30% tax on trust distributions to beneficiaries aged over 18. The changes will apply from 1 July 2019, but will exclude:
special disability trusts
cash management trusts
public unit trusts.
Depending on how this measure is implemented, it could have significant tax implications for businesses operating through trusts. Such businesses tend to be small, family businesses. It may also have significant tax consequences for superannuation funds which tend to invest in non-fixed trusts, rather than fixed trusts.
Under Labor’s plan, shareholders will still be able to utilise franking credits to reduce their tax liability. However, where the credits exceed the total tax liability, they will no longer be able to obtain a tax refund effective 1 July 2019. Centrelink pensioners and charities will be exempt from these changes. Self-managed superannuation funds that had at least one pensioner recipient before 28 March 2018 will also be excluded.
SMSFs are currently the major recipients of franking credit refunds and therefore are likely to be the most impacted by the proposed changes. Self-funded retirees with direct share investments are also likely to be substantially affected.
Superannuation related changes include:
Reduce the non-concessional contribution cap from $100,000 to $75,000
Remove the ability to make catch up super contributions (currently available if the person’s total superannuation balance is less than $500,000)
Change the Division 293 threshold from $250k to $200k. (This is the additional 15% tax on superannuation contributions where a person’s taxable income plus superannuation contributions exceeds the threshold)
Remove the tax deductibility of personal superannuation contributions for salary and wage earners. Presumably this will mean that salary and wage earners will once again need to utilise salary sacrifice arrangements through employers to effectively obtain a tax deduction for superannuation contributions.
Superannuation funds will no longer receive refunds of excess franking credits. Large superannuation funds and some SMSFs where concessional contributions are still being received are likely to have sufficient tax payable to enable full recoupment of the imputation credits against other tax liabilities. However, SMSFs where its members are no longer contributing and are paying pensions will cease to receive the refund of excess franking credits.
Prohibit direct borrowing by superannuation funds for housing investments on a prospective basis
30% minimum tax applied on trust distributions received by superannuation funds from non-fixed trusts. Most superannuation funds would not have investments in non-fixed trusts so this is likely to have minimal impact on superannuation funds.
Phase out the $450 minimum monthly income threshold for superannuation guarantee contributions so eventually all amounts earned as salary and wage income, no matter how small) will need to have the relevant superannuation contribution remitted by the employer (currently 9.5%)
Increase penalties for superannuation guarantee shortfalls.
Labor has also proposed a number of other changes including:
Reintroduction of the 2% budget relief levy where taxable income exceeds $180,000. Presumably the FBT rate will also increase by 2% to 49%.
Reversing the now legislated changes to individual tax scales that are scheduled to come into effect from 1 July 2022
Offering a larger tax cut of up to $398 to people earning less than $125,000 per year from 1 July 2019
From 1 July 2021, allow businesses to expense 20% of the value of new eligible depreciation assets upfront, with normal depreciation rules applying to the balance including the first year. Excluded assets include buildings, passenger motor vehicle and assets less than $20,000. However, it will cover depreciable intangible assets, such as software, patents and copyright.
Cap tax deductions for individuals for the management of their tax affairs to $3,000
Require all individual Australian taxpayers to declare to the Australian Taxation Office if they have residency or citizenship of any other jurisdiction and name that jurisdiction.