In our May 2018 special edition newsletter, we discussed the tax policies of the major political parties in Australia at that time. This was back when newspapers and online media were fervently covering the major issue being proposed by the Labor party; that of cancelling tax refunds arising from excess imputation (or franking) credits.
As the Federal election is drawing ever nearer (and the prospect of a change in Government seems ever more likely!) we thought that we should revisit some of the more significant policy proposals as some of you may be substantially affected by them if they become law (and could apply from 1 July this year!)
Bob Deutsch Senior Tax Counsel of the Taxation Institute of Australia recently said “The next Federal election is looming as one of the most important elections in recent times particularly having regard to the differences between the two alternatives on tax policy.”
We have summarised the major parties tax policies for you and given some brief explanations in each of the following links:
The Coalition Government supports the following:
- A reduced corporate tax rate for all companies eventually with a target rate of 25%
- Proposed reduction in personal tax rates particularly for income levels up to $100,000, summarised as follows:
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Immediate tax relief for low and middle income earners
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The Low and Middle Income Tax Offset will provide a benefit of up to $200 for taxpayers with a taxable income of $37,000 or less. Between $37,000 and $48,000 the offset will increase at a rate of 3 cents per dollar to the maximum benefit of $530. From $90,001 to $125,333 the offset will phase out at the rate of 1.5 cents per dollar.
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Lifting tax brackets to protect taxpayers from ‘bracket creep’ and eliminating the 37% tax bracket. The following tables summarise the proposed tax bracket changes:
Tax rates and thresholds for 2018-19 onwards
Rate
2018-19 to 2021-22
2022-23 and 2023-24
2024-25 onwards
0%
$0-$18,200
$0-$18,200
$0-$18,200
19%
$18,201-$37,000
$18,201-$41,000
$18,201-$41,000
32.5%
$37,001-$90,000
$41,001-$120,000
$41,001-$200,000
37%
$90,001-$180,000
$120,001-$180,000
N/A
45%
$180,001+
$180,001+
$200,001+
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Self-employed age pensioners will be able to access the Pension Work Bonus and earn up to $7,800 per year without reducing their pension payments.
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Employers of older Australians will be able to access wage subsidies of up to $10,000 and a new Skills and Training Incentive will be offered to mature workers.
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Those on full pension and self-funded retirees will be able to access the Pension Loans Scheme, allowing them to increase their income by up to 50% of the Age Pension.
- Medicare levy to remain at 2%.
- No changes to negative gearing on investment property
- No change to Capital Gains Tax (“CGT”) discounts which is currently at 50% for individuals
- No change to the current taxation of distributions from discretionary trusts
- No change to the dividend imputation system, in particular maintaining a full refund of excess imputation credits
- The immediate $20,000 depreciation asset write-off will be increased to $25,000 for eligible taxpayers (turnover less than $10m) and will continue until at least 30 June 2020.
- Self managed super funds will be allowed to have up to six members (up from the current maximum of four) from 1 July 2019
(2) The Labor party supports the following:
- Company tax rates to be standardised to 30%, with possible lower rates for small corporate entities (turnovers under $2m)
- Increase the top personal tax rate to 49 per cent from 47 per cent and lower personal tax rates at the lower income levels
- Increase the medicare levy to 2.5% for those earning over $87,000 p.a.
- Negative gearing would be retained in its current form for new housing going forward and existing assets. Negative gearing losses in respect of all others assets would be limited to being deductible against other investment income or capital gains (but not against salary and wages)
- Reduce the CGT discount by 50% to 25% for all assets acquired from 1 July 2018. Existing assets to be grandfathered under current rules
- A minimum tax of 30% on all distributions from discretionary trusts paid from 1 July 2019 to adult beneficiaries
- No refund of tax in respect of excess imputation credits (see separate article on this)
- New tax initiative giving a 20% tax deduction in respect of the purchase of any new eligible asset worth more than $20,000 in the first year, with the balance in line with normal depreciation from first year. New measures to commence from 1 July 2020
- Limit the tax free income streams being paid from superannuation funds to $75,000 per annum, where a member’s superannuation balance is more than $1.5m. First $75,000 paid as a pension will be tax free. Income earned from super above that would be taxed at 15%.
- Cap the amount an individual, trust or partnership can claim as a tax deduction for the management of their tax affairs (i.e. tax agents and accountants fees) to $3,000 per annum from 1 July 2019
- Non concessional (after tax) contributions to super be reduced from $100,000p.a to $75,000p.a.
- Tax deductions for personal super contributions will be abolished
- Remove the ability for SMSF’s to borrow funds to invest
The three most significant tax policy changes that Labor are proposing should they be elected are discussed further below:
(i) Refund of excess imputation credits
Probably the most talked about policy has been Labor’s proposed elimination of tax refunds arising from excess franking credits. To help explain this and its impact we have prepared the following summary for you.
Dividend imputation was introduced by the Labor government in 1987, to prevent so-called double taxation of company profits. This meant that shareholders did not need to pay tax on their dividends, for which the company had already paid tax. There was a change in 2000, when the Howard-Costello Coalition government amended the policy, making it more generous for Self-Managed Super Funds (“SMSFs”) and self-funded retirees — a policy which still exists today.
The effect of this change was that shareholders who pay no tax — or pay a lower rate of tax than the company tax rate (30 per cent) — can convert excess franking credits into cash refunds from the Australian Taxation Office.
When companies pay dividends, they can include franking credits (or imputation credits) for shareholders who can then use them to offset their personal tax liabilities. These franking credits represent each shareholder’s share of tax already paid by the company (in company tax payments) on their behalf.
Most of the major Australian banks and industrial stocks listed on the Australian Stock Exchange have franking credits attached to their dividends. If there were no franking credits shareholders will be required to pay more tax on the dividend that they have received, meaning this money will effectively be taxed twice.
Here’s a simple example to illustrate how it works.
Let's assume a person gets paid a fully-franked dividend of $1,400 (with a franking credit of $600). This franking credit represents the tax the company has already paid — meaning the dividend (before company tax was deducted) would have been $2,000 ($1,400 plus $600). This individual taxpayer must declare $2,000 (the $1,400 dividend plus the $600 franking credit) in his/her taxable income. If this dividend was the person's only income, they would be below the tax-free threshold and not have an income tax bill. Since the company has already paid $600 in tax, he/she will be entitled to a refund from the ATO of that $600 in tax. If Labor wins the next election and introduces its tax plan, these refunds will cease.
On March 27, 2018 after an initial backlash, Bill Shorten and Labor announced a significant easing back of their proposed policy. Mr Shorten said:
"Pensioners and allowance recipients will be protected from the abolition of cash refunds for excess dividend imputation credits when the policy commences in July 2019." This amendment will see those who receive the Age Pension, Carer Payment, Disability Support Pension, Parenting Payment, Newstart and Sickness Allowance will be exempt from the new proposal. Labor also announced on the same day that SMSFs with a member entitled to Centrelink benefits, such as the old-age pension, would not be subject to the loss of franking offsets.
If implemented we believe this change in tax policy will significantly impact a lot of SMSFs with investments in shares and managed funds that produce franking offsets. Put simply, superannuation funds generally pay tax at 15% when their members are in accumulation stage and 0% tax in pension phase up to the $1.6m cap. When those funds in accumulation phase receive imputation credits (at 30%) they obviously receive a tax benefit of 15% on those dividends and many thereby reduce other tax payable on other investments and even receive a tax refund in some cases.
Labors new tax policy will prevent these refunds being made, limiting the franking credit to tax otherwise payable.
Self funded retirees with dividend paying share investments in their SMSFs
currently pay 0% tax and receive the full value of these imputation credits
as a tax refund each year. Again, these tax refunds will cease under this
new policy.
If Labor is elected and implements the proposal, SMSFs are likely to revise their portfolios in view of the reduced attractiveness of Australian shares and managed funds compared to other alternative investments such as overseas shares, property and other asset classes.
(ii) Negative gearing
The current housing market in Australia has prompted the Labor party (ALP) to update their policy on negative gearing and capital gains tax concessions. This is based on the assertion that current concessions are inequitable and favour the rich and do not support investment in new housing stock. Some of the key components of the ALP’s policy are a proposal to limit negative gearing to new and existing housing (only) and reduce the capital gains tax discount from a current rate of 50% down to 25%. Therefore investments made in non new housing would not be eligible for negative gearing concessions (this includes for example, share investing.)
Investment properties
The ALP will limit negative gearing to purchasers of new housing and pre-existing properties. Under the proposed policy taxpayers will still be able to deduct net rental losses from salary and wage income – provided the losses come from ‘newly constructed' housing (or pre-existing housing before the new proposed legislation comes into affect).
Losses from negatively gearing properties (other than new housing) will not be allowed to be claimed against salary and wage income but can be claimed against other investment income or capital gains.
Shares
The proposed changes to negative gearing will have a significant impact on negatively geared share investments. The ALP policy indicates losses from new investments in shares will remain eligible for offset against investment income, however, the policy is short on detail of exactly how the ALP intend the proposed legislation to apply.
Under the proposed legislation, losses from new investments in shares will ONLY be able to be offset against tax liabilities relating to investment income. This means losses from new investments in shares will be able to be offset against:
- income directly relating to the investment (e.g. dividends, managed trust distributions); and
- positively geared rental income.
Losses from new investments in shares will NOT be able to be offset against salary and wage income and any excess losses will be carried forward to be offset against either future investment income, future positively geared rental income or be used to reduce any capital gain on sale.
Essentially, the ALP policy will result in the addition of a new category of tax loss – the investment loss. This will result in a whole new layer of complexity when preparing individual tax returns with taxpayers impacted having to appropriately calculate, apply and carry forward investment losses in addition to dealing with capital losses.
High wealth taxpayers with a mix of negatively and positively geared investments and investments acquired prior to the proposed changes are the winners under this plan, as they are more likely to be able to fully utilise deductions against both salary and wage and investment income.
Low to middle-income earners will lose out. The typical mum and dad investor trying to build wealth by borrowing against the equity in their home to fund a single investment asset will be the biggest losers, as they will no longer be able to help fund the purchase of the asset with the use of tax losses offset against salary and wage income.
The policy is proposed to take effect from a yet-to-be-determined date after the next election (assuming the ALP is elected to government). The ALP has stated that investments made before this date will be unaffected by the change and will be covered under grandfather clauses.
(iii) Capital Gains Tax
Under this proposal, capital gains discounts for all assets will be halved; the capital gains tax discount for assets held longer than 12 months will decrease from 50% to 25%.
The ALP has indicated that their policy change will not apply to investments made before the implementation date and will be fully grandfathered, in line with the approach to the negative gearing changes.
The ALP have also indicated that investments made by superannuation funds will be excluded and there will be no changes to the existing small business capital gains tax concessions.
So what does all this mean for the future?
Here’s an article our financial planning advisory team (StewartBrown Advisory) wrote that may assist in further understanding what you might consider doing if these changes come to fruition.
Click here to download the financial advisory March 2019 investment update.
Please contact your StewartBrown Partner or Manager if you would like to discuss these matters further, particularly if you have concerns about how these may affect you, your SMSF and your tax planning strategies moving forward.
