The lack of detail typical with most election policy announcements does not make the planning process easy, especially when the election outcome at this stage is only a prediction. So the best approach to take is to be well informed about the proposed changes and the potential impacts. This will allow you to react with confidence once our political direction starts to become clearer.
Following are the key Labor proposals announced so far and their potential impacts:
- Negative gearing limitations
- Capital Gains Tax (CGT) reduction from 50% general discount to 25%
- Refund of dividend imputation credits removed
- Reduction in superannuation contributions
- 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 offset losses from a negatively geared investment against other income, including salary and wages, reducing the taxpayers overall tax position.
- Labor has announced that it will limit tax payers ability to offset negative gearing losses from 1 January 2020 to only newly constructed housing investments.
- It is intended that tax payers will be able to carry forward their isolated losses to reduce any future capital gain from the investment.
- This policy was first raised during a time when property prices were on a continuous upward trend and was intentionally aimed at reducing the appetite of investors.
- The lower after tax return will no doubt impact pricing and yield expectations for investments. There will also be implications for cash flow to investors and their ability to obtain finance.
Reduction in CGT Discount
Labor is proposing that the CGT discount be halved from 50% to 25%. Like negative gearing, this policy was initially aimed at investors in an overheated property market.
Key details currently available include:
- The reduction of the CGT discount is currently intended to only apply to CGT assets acquired after 1 January 2020.
- There will be no reduction in the current 33.3% CGT discount for regulated superannuation funds.
Refund of Dividend 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 become a non-refundable tax offset.
Key details include:
- The proposed changes will apply from 1 July 2019. Franking credits will still reduce any tax liability, but excess franking credits will not generate a cash refund for taxpayers.
- This is likely to have an impact on the mix of investments held by individual retirees and SMSFs, with investors moving away from investments offering a high component of franked returns.
- 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.
A number of proposed policies are aimed at limiting the amount that members can contribute and retain in superannuation. At this stage it is unclear when these policies are intended to commence. The proposed policies include:
- Further reducing the annual non-concessional cap from $100,000 to $75,000
- Abolishing the ability for members to average concessional contributions over 5 years, known as catch-up contributions
- Removing the ability for employed people to make personal deductible contributions
- Lowering the income threshold for higher contributions tax from $250,000 to $200,000
- Abolishing borrowing by Self-Managed Superannuation Funds (SMSFs)
Minimum 30% Tax on Discretionary Trust distributions
Labor is not proposing to tax trusts, such as companies, they are planning on taxing the beneficiaries over 18 years of age a minimum of 30% tax on trust distribution income received from 1 July 2019.
- For many small family businesses that legitimately operate their business through a trust for asset protection this policy will likely give rise to a higher tax burden.
- The policy has excluded charitable trusts and farm trusts as well as disability trusts, deceased estates and fixed trusts.
Changes to Division 7A
The changes Labor are proposing are significant and will impact our current investment landscape. The devil will be in the details, so it’s important to have a proactive plan in place to reduce the impact on your practice and you personally.
Stay a step ahead and start forward planning today - get in touch with our team at BLG Business Advisers online or by calling (02) 4229 2211.