Labor Tax Changes – Something to Worry About?
With an election due by May 2019, and quite possibly happening before then, and with Labor holding an election winning lead in the polls, it’s worth considering their tax changes as announced and what the impact could be.
** There are 3 main tax policies announced so far: **
- Restriction on claiming losses from negatively geared property investments;
- Reduction in the CGT discount
- Removing the cash rebate for excess franking credits
**Negative gearing **
Properties acquired after 1 July 2017 will only be able to claim losses from rental activity against other income if the property acquired was new. If you acquired an existing property (i.e. not a new property) after 1 July 2017, then any losses on the rental activity of that property will not be available to offset other income – but rather will carry forward until the property makes gains or is sold at a profit.
The aim of the policy is to direct property investment toward new development and remove investor price pressure from existing properties.
The truth is both political parties have taken a swipe at property investment, with the Coalition policy to deny deductions for depreciation of plant, fixtures and fittings in existing properties (i.e. not new properties) already in place.
** Reduced Capital Gains Tax Discount **
Coupled with the above policy to restrict negative gearing deductions, is the policy is to reduce the CGT discount for individuals from 50% to 25% for all assets acquired after 1 July 2017, where the asset had been held for more than 12 months. This policy applies to all capital gains, whether related to property or shares or any other asset class.
There is to be no change to the discount offered to superannuation funds (1/3rd discount).
While the discount still allows an investor a concession marginal rate of tax compared to other forms of income, the policy seems to ignore, or down play, the impact of having all of the gain taxed in the one year, when the gain may have accrued over a number of years.
The tax impact of this change is, for a tax payer on the top marginal rate (which is not unusual where there is a significant capital gain) that there will be up to $11,750 extra CGT payable for each $100,000 of capital gain.
** Removing cash refunds arising from dividend imputation credits **
Perhaps the most contentious of the proposed tax changes, Labor have recently announced that they will deny cash refunds where those refunds only arise due to excess franking credits (also referred to as imputation credits).
This policy mainly seems focussed on the SMSF sector, where funds with members in retirement (pension) phase often see refunds of franking credits attached to dividends they receive during the year. The policy to allow refunds of excess franking credits was implemented in 2001 as a means of having company profits ultimately taxed at the marginal rate of the investor receiving the dividend (tax free for super funds supporting members in retirement, personal marginal rates for most other investors).
It is worth noting that dividend income streams will now be apparently taxed at a different rate than property and other asset classes (where there typically isn’t an imputation regime). This is appropriate when comparing dividend returns on share investments to returns on property investments, where the landholder just pays their marginal rate (same case where property income streams are received through property trusts).
Not long after the announcement, the aspiring Prime Minister beat a fairly hasty retreat, promising that people on ‘part pensions’ would receive some sort of compensation so they wouldn’t be any worse off. There’s no way to tell how this will operate in practice right now as there are too many unknown details concerning this policy. Another unknown is how larger super funds will be treated, where some members are in pensions phase (and hence no or little tax) and some are still in accumulation (i.e. making contributions) – will these funds be able to attribute excess credits to the pension member accounts because the fund overall doesn’t receive a refund? This would be a significant unfair advantage to retail and industry funds (no prizes guessing where a lot of union types sit on boards).
**What to do? **
Given the state of the polls it would be folly to ignore Labor policy on the basis that they are only in opposition – they have clearly stated the dates from which their policies will operate and those dates will be before the next election – so potentially in operation before we know for sure who will form the next government.
How you structure your next investment may be worth some consideration – for example if you have existing rentals you may want to look carefully at your financing structure on those when considering finance for the next one. If you have a portfolio of investments in your SMSF you may want to consider the allocation mix so that there are no ‘excess’ imputation credits.
Please contact one of our advisors should you wish to discuss your personal circumstances in more detail.