Labor has been very vocal regarding their plans to overhaul the tax system should they be elected. The impact of their current plans would look something like this:
1. No refund of excess franking credits for individual taxpayers and superannuation funds from 1 July 2019
Low or no tax paying investors will no longer get a refund of tax paid by companies on their franked dividends.
From a tax policy perspective, the intention of the imputation system (franking credits) was to prevent income being taxed twice – both at the company level then again at the shareholder level. Where a shareholder pays tax at a rate less than the company tax rate i.e. less than 27.5% or 30%, then a refund of company tax paid means that the company profits are effectively being taxed at a lower rate overall causing perceived leakage in the tax system.
Unfortunately, if you currently have investments in Australian shares and reap the benefits of tax refunds as a result of fully franked dividends, this may disappear for you. This refund of franking credits has often been thought of as an extra bonus when investing in Australian shares and therefore its removal may lessen the appeal.
2. Reduced CGT discount from 50% to 25%
This change will mean taxpayers eligible for a 50% discount on capital gains (individuals and trusts) will no longer be given a 50% discount when they sell the asset after owning it for 12 months or more. Instead, they will get only a 25% discount.
The CGT discount was brought in in 1999 as a means of softening the blow of removing CGT averaging and of freezing indexation on capital gains. In a low inflationary environment this has been costly to tax revenue.
However, for Australians that invest in capital assets, such as shares and investment properties, this may be a real hit to their income on these assets.
3. Only limited negative gearing
Whilst the Coalition Government tinkered with negative gearing by limiting deductions on depreciating assets for existing rental properties, the Labor party proposes to go the whole way and abolish negative gearing entirely for newly acquired existing properties.
Negative gearing was once previously removed by the Labor Government back in 1985, who experimented with quarantining interest costs against the property income generated. This meant that rental property investment losses had to be carried forward until the property was sold. This lead to investors turning away from property as an investment and caused rents to soar. The move was reversed by the Labor government in 1987. We have since quietly enjoyed the advantages negative gearing has provided without limit until now.
It appears that the existing law will be grandfathered for existing property owners as well as the laws remaining for new properties. However, new investors in older properties will need to be aware. This may lead to looking at other ways to structure your investment property purchases i.e. buying the property in a company or trust instead.
4. Minimum tax rate on distributions from discretionary trusts of 30% from 1 July 2019
Labor propose to impose a minimum 30% tax payable on discretionary trust distributions. The party’s opinion is that, whilst some people legitimately use trusts for commercial reasons such as asset protection and business succession, discretionary trusts can also have tax advantages and are used by high-wealth individuals to minimise their tax obligations. This arises because a trust can distribute income to low or no tax beneficiaries of the trust rather than to higher taxed beneficiaries. By Labor ensuring that these low tax beneficiaries pay at least 30% tax on their distributions, some of the tax benefit will be lost.
This may have a large impact on business owners who operate through trusts and can affect end of year tax planning. Again, a change like this may affect the way you structure your business arrangements going forward.
What does this mean for you?
So what we can learn from the above is:
- If you are invested in shares you may lose the tax advantage of franking credit refunds;
- If you choose to therefore sell those shares you may pay more CGT than under a pre-Labor government;
- If you choose instead to buy property you may not be eligible to negatively gear this and when you sell that property you may be paying more CGT than previously paid; and the grand finale….
- If you do anything through a trust you may be up for more tax.
So what should you do?
It is perhaps too early to be changing the structure of existing investments and activities for what “might be”. However, it would be wise to keep these tax policies front of mind when embarking on new activities that may be affected by a change in one or more of the above tax laws. There may be a way to structure arrangements that takes these potential changes into account. We recommend that you seek advice from your tax adviser to consider your options.
If you would like to find out more about the potential impact of these plans and how they may affect your business, contact your Pilot advisor or Sally Hindson on 07 3023 1300.