With the odds in favour of the Australian Labor Party winning the next election it is time to start considering what these proposed tax reform changes mean and start planning.
A snapshot of the main changes proposed by Labor that will require proactive planning are as follows:
- Negative gearing limitations
- Capital gains tax reduction from 50% general discount to 25%
- Refundable tax offsets removed for imputation credits
- A minimum 30% tax rate enforced on income earned through discretionary trusts
Labor proposes to isolate losses from negatively geared real property investments and investments in shares which means they can’t be deducted against salary and wages income.
- Under the current system, tax payers can use losses from a negatively geared investment to offset income from any source. It is not clear in Labor’s proposal whether the losses will be isolated against only salary and wage income, or from all other categories of income, so taxpayers could only apply losses from negatively geared investment property to offset other rental income.
- Labor has confirmed that taxpayers will be able to carry forward their isolated losses to reduce any capital gain coming from their investment.
- There will be implications for cash flow to investors and their ability to obtain finance.
- The isolation of losses will not apply to ‘newly constructed housing’. Although it is not certain what ‘newly constructed housing’ is being defined as.
- Labor has confirmed that the changes will not apply retrospectively.
Reduction in CGT Discount
Labor is proposing that the CGT discount be halved to 25%. Key details currently available include:
- The reduction of the CGT discount will only apply to CGT assets acquired after a yet-to-be-determined date. Labor has confirmed that the change will not apply retrospectively.
- A key feature of the proposal is that the reduction in the CGT discount will not apply to ‘small business assets’. Again what a ‘small business asset’ is has not been defined.
- There will be no reduction in the current 33.3% CGT discount for regulated superannuation funds.
Denial of Refundable Tax Offsets for Imputation Credits
Currently, where a tax payer’s imputation credits at the end of a financial year exceed their tax liability, the tax payer receives a refund from the ATO. Labor’s proposal is that imputation credits return to being a non-refundable tax offset. Key details include:
- The proposed changes will apply from 1 July 2019. Labor has stated that this will affect future earnings and franked dividends that continue in the following financial year (ending 30 June 2021). As imputation credits are refunded after the end of a financial year, those refunds will stop being available to tax payers sometime after 30 June 2020. The changes will apply to corporate profits earned, and dividends and imputation credits distributed, during the financial year ending 30 June 2020, unless Labor introduces alternative transitional provisions.
- Labor has stated that shareholders who may be affected will have the ability to adjust their investment decisions to limit any impact from this policy, though it is not yet clear what this means.
- A refund of imputation credits will continue to be available for individuals on the government age pension or other allowances, or for an SMSF with a member receiving the government age pension, as at March 2018.
Discretionary Trusts – 30% Tax
- Labor is not proposing to tax trusts, such as companies, they are planning on taxing the beneficiaries aged over 18 years of age a minimum of 30% tax from July 2019.
- The policy has excluded charitable trusts and farm trusts as well as disability trusts, deceased estates and fixed trusts.
The changes Labor are proposing are significant and will impact our current investment landscape. The devil will be in the details and there will be a lot of proactive planning opportunities available, which BLG Business Advisers will be sure to communicate with you should Labor be elected. Stay a step ahead and start forward planning today by getting in touch with our team online or by calling (02) 4229 2211.