What you need to know about Labor’s proposed changes to Tax Policy
By Gareth de Maid, Relationship Manager – Financial Strategy Specialist
As a second part to our analysis of Labor Party taxation policy, we’ve turned our attention to personal taxation and broader policies outside superannuation. If you haven’t read our last article relating to ALP taxation of superannuation policy, refer here:
As with the first article, the below in an examination of policy, not a criticism, critique or show of support.
- The removal of imputation credit refunds
In 1987, then Prime Minister Bob Hawke and Treasurer Paul Keating introduced imputation credits. Imputation credits (otherwise known as franking credits), are a credit for tax already paid by a company, which an entity (commonly an individual) invests in. Largely, the argument was that the investor owned a portion of the business and hence, shouldn’t be taxed twice – once at the company and then again at the individual level.
In 2000, Peter Costello further modified tax policy, such that if the owner has a marginal tax rate which is less than the company tax rate, then the owner should be entitled to the franking credit back as a tax refund. The argument here was that the investor had effectively “over paid” and hence, should be entitled to the tax back.
Bill Shorten has identified this facet of tax policy as a loophole:
If this policy is implemented, there could well be a seismic shift in the structuring of client’s affairs. The danger here of course, is that the policy is implemented quickly upon election and gives investors little time or opportunity to restructure their affairs appropriately. We are encouraging clients to work with us and their accountants in order to foreshadow what this policy will mean for their net taxation and whether steps should be taken in order to enable clients to restructure swiftly (or even prior).
Mr Shorten has claimed “In terms of pensioners, I give this promise: pensioners will always be better off under a Labor Government. We’re always working on ways to make sure that the least well off and our older Australians, get the best deal possible, and so we’ll have more to say about that in coming weeks.”1 We are yet to see concrete policy information regarding this statement.
- Increase to the Medicare Levy & Budget Repair Levy Reinstatement
The Labor party proposes a 0.5% increase to the Medicare Levy for those earning over $87,000 per annum. For those earning over $180,000, they will also reinstate the Budget Deficit Repair Levy. As a result, the highest marginal tax rate (including levies) will rise to 49.5%.
- Trust law changes
Trust law seldom seems to come under attack from either side of the political sphere, however, Labor has proposed that as at 1 July 2019, distributions from discretionary trusts to adult beneficiaries will be taxed at a minimum of 30%. For those beneficiaries and trustees, this could have a material impact on net taxation to your family. Again, we recommend you discuss this with us in co-ordination with your accountant in order to plan appropriately.
- Negative gearing
Labor has proposed that negative gearing will remain in its current form, however, only for new housing and existing assets (so effectively grandfathering existing holdings). Negative gearing in relation to other assets not caught under this net will be deductible against investment income or capital gains (but not against personal incomes or salaries).
- The Capital Gains Tax discount
At present, investors are entitled to a 50% discount on capital gains associated with investment assets. Under proposed changes to policy, the Labor Party proposes halving the discount to 25% for new investment assets.
Information can be found here: https://static.treasury.gov.au/uploads/sites/1/2018/01/FOI_1876_Documents_for_release.pdf
For those looking to crystallise gains in the coming year, you should be considering your timing very carefully. Additionally, record keeping is going to be increasingly important as you will now need to know pre-CGT, 50% CGT discount and 25% CGT discounted assets in order to manage your affairs appropriately.
- Deductions for tax management
Labor seeks to cap the amount individuals, trusts and partnerships can deduct for the management of their tax affairs to $3,000 from 1 July 2019. A carve-out applies to small businesses with positive income and annual turnover of up to $2 million.
- Corporate Tax Rate changes
Labor have announced that they will continue to support tax rate changes to businesses with turnover under $2 million by leaving the effective rate at 27.5%. Those larger companies (with turnovers of between $10 million to $50 million) will have their tax rate increased back to 30%. Labor is still considering the fate for those between $2 million and $25 million.
Wider tax policy, particularly in relation to multinationals etc can be found here:
- The Australian Investment Guarantee (AIG)
Essentially a tax relief scheme, the AIG gives businesses the ability to immediately expense 20% of eligible depreciable assets in the first year of ownership. Additionally, the asset will be written down under a faster depreciation schedule than prior.
- Broader Policy initiatives
More broadly, the ALP campaigned diligently for the current Royal Commission into financial services which is now resulting in almost daily headlines. Depending on the findings of the commission, there could be enough ammunition for a significant government policy shift in relation to banking, particularly the structure of traditional deposit taking and lending banks, versus insurers, investment banks and related financial services businesses. Whatever form this takes could result in massive changes to our banking system here. In fact, one could argue the implementation of a quasi- Dodd Frank Act (https://www.investopedia.com/terms/d/dodd-frank-financial-regulatory-reform-bill.asp) here in Australia. Of note is that some of Labor policy, particularly around whistleblowing, reads similarly to that enacted under Dodd-Frank.
Party policy (or even “captain’s calls”) can change swiftly as parties attempt to weigh the zeitgeist of their announcements. Policy change now may not come to fruition even if Labor is elected, and even then, could be a shadow of the initial proposal by the time they finally make their way through parliament and senate.
So, in short, don’t hurry, but have a nose to the wind in order to give yourselves the best chance to change tack, if appropriate. There’s a lot of change in the above and given that we must have an election by next May, these changes could be upon us quicker than we think. Hence, a co-ordinated, well considered conversation with us and your accountant could be the best investment you make this year.
Gareth de Maid
Relationship Manager – Financial Strategy Specialist
Phone 03 9209 9000
To the extent that this document contains advice: (i) this is limited to general advice only; (ii) has been prepared without taking into account your objectives, financial situation or needs; and (iii) because of this, you should therefore consider the appropriateness in light of your objectives, financial situation or needs, before following the advice and do not act on this advice without first consulting your investment adviser to determine whether the advice is appropriate for your investment objectives, financial situation and specific needs