A Labor victory at the next Federal election in May is a real possibility. Should the ALP win, we can expect new policies that will impact the investment portfolios and tax structures of many people. Based on the Labor policies currently announced, you can expect the five areas below to be affected.
Five potential Labor-win impacts
1. Removal of excess imputation (franking credits) as cash refunds
The dividend imputation system, introduced by Treasurer Paul Keating in 1987, abolished the double taxation of dividends. The system was designed as a tax rebate only, and any excess credits were lost. Treasurer Peter Costello tinkered with this system in 2000 and allowed for a cash refund of any excess. This allowed many taxpayers, including self-managed superannuation funds, to obtain cash refunds of the excess.
Labor’s policy, with some exceptions, will wind back the law to the original Keating version.
This policy will have a very large and immediate impact on the retirement income of many Accru Financial Planning clients. We therefore advise careful analysis to limit the impact of this Labor policy.
2 Property investment related changes
Labor’s policy document ‘Positive plan to help housing affordability’ states that:
- The middle class is being priced out of the housing market
- Ownership rates for younger people aged between 25-34 have fallen from 60% to 48%; and
- Only 1 out of 7 buyers of all houses are first home buyers.
To counter this, Labor believes in removing two ‘unsustainable’ tax subsidies, the first being the CGT discount and the second abolishing negative gearing.
(a) Capital Gains Tax (CGT) discount removal
Currently, individuals and trusts are entitled to a 50% discount on a capital gain made, providing they have held the asset for more than 1 year.
Labor’s proposal is to halve this capital gain discount to 25% for all assets purchases after a yet-to-be-determined date, following the next federal election. There are a few exceptions, namely:
- Investments held before this date
- Investments made by superannuation fund (a 1/3 discount applies)
- Assets that qualify as a small business.
(b) Negative gearing discount removal
Labor’s proposal is to limit negative gearing to new investments from a yet-to-be-determined date, after the next election. Investments held before this date will be grandfathered.
It is important to note that this policy relates to all investment income, not just to individual investments. The good news here is that taxpayers can add their income from all of their investments and deduct losses from the income on their entire portfolio. For example, if a taxpayer had income from a few positively geared properties and purchased another, they can offset the losses from the more recent purchase against the older investments.
3. Taxation of trusts
The current system allows for the distribution of income from such trusts to family members who are on lower tax brackets. Labor plans to introduce a minimum of 30% tax on distributions from discretionary trusts, effective from 1 July 2019. This policy will not impact testamentary, fixed and farm trusts.
4. Limit on tax deductibility of fees for managing tax affairs
One of Labor’s lesser known policy announcements is to limit the tax deductibility of fees charged for managing tax affairs to $3,000. There will be a ‘carve out’ for SMEs with a profit and an annual turnover of up to $2 million.
Apparently, the limitation will apply to software, legal fees and that of tax agents. Interestingly, in 2018 income tax returns, the ATO has asked for a split of the type of claims for tax return preparation fees.
Labor policy announcements indicate they would implement the following changes:
- Non-concessional contributions (NCC) – to be reduced from $100,000 to $75,000.
- Div 293 threshold – this is the additional tax of 15% paid on superannuation contributions when taxable income and super contributions exceed the cap. Labor’s proposal is to reduce the threshold from $250,000 to $200,000.
- SG Contributions – Labor will end the freeze on the current 9.5%. The rate will rise by 0.5% from 1 July 2021 and scale up to 12% from 1 July 2025. The $450 monthly threshold will be abolished.
- Personal superannuation contributions – Labour intends to remove the tax deductibility of personal superannuation contributions for employees. This is a reversal of the policy introduced last year.
Personal tax – Labor will unwind stage 2 and stage 3 of the personal tax cuts, now legislated to take effect from 1 July 2022 and 1 July 2024 respectively. Labor will also reintroduce the budget repair levy for income above $180,000. This will raise the top marginal tax bracket to 49% (inclusive of the Medicare Levy). Presumably, the FBT rate will also rise to 49%.
Corporate tax – Labour will not change the already enacted tax cuts.
What should investors do now?
It’s important to note that the Government has brought forward the Budget to April 2. Should the ALP win this election, which looks likely to be held on 11 or 18 May 2019, we can expect another budget.
We recommend that you endeavour to understand the potential impact on your investments and tax structures so you can be ready to act. If you have not already discussed this with your Accru Financial Planning advisor, please feel free to contact Greg Newbury, Thomas Heenan or Ben Barker.