Despite the Labor party holding a seemingly unbeatable position prior to Christmas, the outcome of the upcoming election appears less certain by the day, adding to the unease for those trying to make predictions. Planning for the future in an air of uncertainty is difficult. The best approach to take is to be well informed about the proposed changes and the potential impacts. This will assist business owners and investors to react with confidence once our political direction starts to become clearer.
Members of our team have covered key areas of the 2019 Federal Budget, so I have briefly outlined some of the key Labor proposals announced so far and their potential impacts:
Minimum 30% tax on Discretionary Trust distributions
- Labor plans to impose a minimum tax rate of 30% on distributions received from discretionary trusts.
- 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.
- Labor proposes to stop investors offsetting investment losses against other types of income, such as employment income. It appears that losses from one investment can still offset gains on other investments. Alternatively losses can be carried forward to offset future capital gains.
- This policy is intentionally aimed at reducing the appetite of investors. The lower after tax return will no doubt impact pricing and yield expectations for investments.
- This policy was first raised during a time when property prices were on a continuous upward trend. If and how the policy may change in current conditions is yet to be seen.
Reduction of Capital Gains Tax discount
- Labor proposes to reduce the capital gains tax general discount from 50% to 25%.
- Like negative gearing, this policy was aimed at investors in an overheated property market.
- This policy will have an even greater impact on investors behavior and expectations than the changes in relation to negative gearing.
- A number of proposed policies are aimed at reducing the amount that members can contribute and retain in superannuation, including:
- 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)
- The approach of limiting superannuation contributions driven by these policies does not align with Labors intention of accelerating the increase to 12% superannuation guarantee
Refund of Franking Credits
- Labor proposes to remove the refund of franking credits. Franking credits will still reduce any tax liability, but not generate a cash refund.
- 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.
- This policy seems aimed at driving people away from SMSFs, back to industry funds.
Changes to Division 7A
- These changes have been addressed in detail by my colleague Luke Bland in his recent blog
As the federal election approaches, BLG will be providing updates on proposed policy changes and advisory pieces from our team. Make sure you have a plan in place for these proposed updates as they could have a significant impact on your business and you personally. Our team at BLG Business Advisers will readily assist you - simply get in touch online or calling (02) 4229 2211.