Election run on Labor’s Proposed Tax Plan
As Australia gears up for a federal election, it is no surprise that we are starting to hear more and more news and speculation surrounding the possible tax policies and their potential implications for both business and industries. Recently, Labor announced some proposed changes to federal tax arrangements, notably to negative gearing and Capital Gains Tax, which would likely be enacted if they are elected in May later this year.
What are some of the policies Labor are proposing?
1. New rules to limit negative gearing
As part of Labor’s plan to improve housing affordability, it has proposed to limit negative gearing to “new housing”. There is no guidance on a start date, however, there is an expectation that existing instruments will retain a negative gearing position.
While this proposition is touted to improve housing affordability for renters and first home buyers, it could instead disincentive investors and bring some negative effects to suburbs with already weak property markets. It is also noted that others assets, can be negatively geared not just property and therefore how this change would be enacted could have a wider ranging impact than initially thought.
2. Reducing the Capital Gains Tax discount
If you are an individual, superfund or trust, you could now face a halved CGT discount (i.e %25 rather than the current %50) under Labor’s proposed tax plan. This means that the previous benefits of structuring passive assets under individual or trust ownership would now be reduced. As a result, this could lead to companies becoming the investment vehicle of choice.
However, it is interesting to note that Labor’s website states the ‘CGT discount will not change for small business assets’ to ‘ensure that no small businesses are worse off under these changes’. This general statement raises some questions as to who and what specifically this proposed policy change will in fact apply to. Again, the existing investments are said to retain the %50 discount entitled.
3. Eliminating Cash Refunds for excess franking credits
If elected, Labor has proposed to end cash refunds for excess franking credits for individuals and superannuation funds. This means that as of July 1 2019, franking credits will no longer be a refundable tax offset, and instead will return to being a non-refundable tax offset.
While there is substantial media coverage concerning the potential negative implications of these changes on self-funded retirees, superannuation funds and low-income earners, it has also led to a rush of special dividends from companies as companies with excess franking credits aim provide shareholders with the benefit of the credits before the election.
4. Limiting tax deductions for managing tax affairs
Under Labor’s proposed plan, tax deductions for tax advice for individuals, self-managed superannuation funds, trusts and partnerships are proposed to be capped at $3000 a year as part of their strategy to reduce ‘loopholes for millionaires’ – tax minimisation.
While this policy will not prevent anyone from spending more than $3,000 on tax advice, it is likely to lead to an increase in non-compliance as taxpayers may not understand the complex laws necessary to higher risk positions being negatively geared.
5. Raising the top marginal tax rate by 2%
Labor has proposed to raise the top marginal tax rate from 47% to 49% making it one of the highest marginal tax rates in the world. While this policy aims to raise approximately $5bn over 4 years in it could also bring some adverse effects to business owners, investors and entrepreneurs.
So, what should you do?
While there may be considerable media coverage and speculation surrounding their implications on businesses and individuals, all of the above policies and changes are currently just propositions. As such the best thing you can do is to stay informed and keep an eye out for any developments throughout the year. If you have any questions in relation to how Labor’s proposed tax plan could impact your specific situation or any f the other proposed tax changes, please contact your engagement partner on 02 9283 1666.