Tax changes to expect under a Labor government

By David Downie, Partner

With Sportsbet currently showing the Australian Labor Party (ALP) as $1.20 favourites to win the next Federal election, it is a good time to consider the likely tax implications of a Labor win. Below, we summarise the likely changes based on the ALP’s policy announcements to date.

The effect of the announcements will be to increase effective tax rates; to discourage investment in second-hand property and Australian shares; to tax some self-funded retirees at a higher rate than other retirees; to impose a minimum 30% tax rate on beneficiaries of many discretionary trusts; to discourage taxpayers from seeking tax advice where they have complex affairs, and to increase depreciation deductions for some small businesses.

Removing negative gearing

• Losses from negatively geared real property and share investments will be quarantined so that they cannot be deducted against salary or wage income. The changes will only apply to properties purchased from a date to be announced and will not apply to existing investments.
• Newly constructed housing will be exempt from the new quarantining rule. There is no guidance on the definition of newly constructed housing e.g. does a “knock down rebuild” qualify?

Reduction in Capital Gains Tax discount to 25%

• The current discount of 50% on assets held by individuals and trusts for more than 12 months is to be halved to 25% for assets acquired from a date to be announced. The change will not apply to gains on currently held assets.
• The change will not apply to “small business assets,” however, these are yet to be defined under the new rules.
• No change will apply to superannuation funds where the current one third discount will continue to be available.

Removal of refunds for franking credits

• Where an individual or superannuation fund has franking credits in excess of their tax liability for the year, they will no longer be entitled to a refund of the excess franking credits. The exceptions will be recipients of the government age pension on 28 March 2018, or self-managed superannuation funds where a member was receiving a government age pension on the same date.
• Charities and non-profit institutions will still be able to claim refunds of franking credits.
• Interestingly, the changes will not apply to members of industry or retail superannuation funds who will continue to have excess franking credits attributed to their member accounts.
• The change is to apply from 1 July 2019.

An increase in the top marginal tax rate from 45% to 47%

• This will effectively increase the top marginal tax rate from 47% to 49% including the 2% Medicare Levy.

A minimum 30% tax rate on distributions from discretionary trusts

• Currently, a beneficiary that is allocated a distribution from a discretionary trust pays tax on the distribution at their marginal tax rates.
• The ALP will introduce a minimum 30% tax rate on discretionary trust distributions to beneficiaries aged 18 or over from 1 July 2019.
• Exemptions will apply for beneficiaries with disabilities.
• Special disability trusts, deceased estates (presumably including testamentary trusts) and fixed trusts, “farm trusts” and charitable trusts will not be affected. As yet, there is no guidance on what level of farming activity will need to be undertaken by a trust to qualify as a “farm trust.”

A $3,000 annual cap on deductions for tax advice

• The ALP is concerned that some taxpayers are unfairly reducing their tax obligations through the use of “clever tax lawyers” (per Bill Shorten’s 2017 budget reply speech). As a result, they propose to impose a $3,000 limit on the annual tax deduction available for the costs of managing tax affairs for individuals, SMSFs, trusts and partnerships.
• It is unclear whether an exemption from the cap will apply for small business.

Provide a 20% write off for capex up to $20K

• Currently the immediate tax deduction for small businesses for capital assets with a cost of up to $20K expires on 30 June 2020. The current government intends to increase the threshold to $25K.
• The ALP proposes to provide a 20% write off for assets with a cost of up to $20K for businesses with a turnover of less than $10M with no expiry date.

Of course, the devil will be in the detail regarding any changes to the rules. For example, will losses from one negatively geared rental property be available to offset income from another property investment or against dividend or other non-salary income? Will there be a change to the qualifying holding period for the capital gains tax discount? Will capital gains tax rollovers be available for discretionary trusts that wish to restructure as a result of the changes? If the ALP are elected we will need to wait to see the draft legislation regarding any changes before further comment can be made.

Please let us know if you have any questions regarding how the proposed changes may apply to you or if you wish to discuss potential tax planning options to minimise the impact of the proposals.

This summary has been prepared after attending a seminar by Geoff Stein from Brown Wright Stein and we would like to thank Geoff for his comments on the topic.

Feel free to comment below with your own thoughts!