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What are Labor’s proposed tax changes?

Whilst we are reluctant to fuel the fire of an already uncertain landscape, this is one the most common queries we are currently fielding from our clients. Here we outline some of the key tax proposals should Labor win the next Federal election in May 2019.

Franking Credits

Labor propose to abolish the cash refund of franking credits from 1 July 2019. Currently, lower income earners who receive dividends from Australian companies, whereby the attached franking credits more than offset the tax that they are entitled to pay, receives this in the form of a cash refund.

Lower income earners are typically people with taxable incomes of $37,000 or lower and Self-Managed Super Funds.

However, Labor have promised to exclude any individual who is entitled to receive an Australian Government pension or allowance.

Negative Gearing

As part of Labor’s plan to improve housing affordability, they have proposed to restrict negative gearing to new housing only. All existing investments before the effective date will be fully grandfathered.

This means that taxpayers can continue to deduct net rental losses against their wage income, so long as the losses come from newly constructed housing.

It is proposed that losses from shares and existing properties can still be used to offset investment income, however not wage income.

Capital Gains Tax Discount

Currently, you are able to discount any capital gain on an investment held longer than 12 months by 50% for tax purposes. From 1 July 2019, any new investments will only be entitled to a 25% discount if held longer than 12 months.

Labor have confirmed that all investments made before this date will not be affected, in addition to grandfathering existing rules for superannuation funds and small business assets.

Taxation of trusts

In 2017, Bill Shorten announced that Labor will introduce a standard 30% tax rate for discretionary trusts distributions to beneficiaries over the age of 18.

It is currently a common strategy for families to distribute taxable income (investment & business related) to adult beneficiaries and take advantage of lower marginal tax rates, however with Labor’s proposal, the minimum tax rate will be set at 30%.

Superannuation Guarantee

Labor plan to increase the superannuation guarantee rate from 9.5% to 12% much sooner than the current legislated gradual increase by 1 July 2025.

After this point, Labor will then have their sights in lifting the rate further to 15%, however no dates have been confirmed in their policies.

Super Contributions

Labor will lower the annual non-concessional contribution cap from $100,000 to $75,000. This subsequently will mean the 3 year bring-forward cap will reduce from $300,000 to $225,000.

Currently, income earners above $250,000 have to pay an additional 15% contributions tax, in addition to the standard 15% contributions tax. Labor plan to reduce the income threshold to $200,000.

From 1 July 2017, all individuals have been able to claim personal contributions to super allowing greater flexibility for tax planning. Prior to 1 July 2017, this was only allowed by individuals earning less than 10% from employee activities (i.e. it was only available to largely self-employed people and non-working individuals). Labor plan to revert back pre 1 July 2017 rules, meaning employed individuals can only make additional concessional contributions to super via premeditated salary sacrifice arrangements.

Limited Recourse Borrowings in SMSFs

Labor plans to ban SMSFs from entering into new limited recourse borrowing arrangements (LRBAs) which is a strategy commonly used to purchase property within super using borrowed funds. This is in line with their greater plan to improve housing affordability. Much like other measures, any existing arrangements will be grandfathered.

Final Word

It goes without saying that until any proposed changes become law (let alone awaiting the result of the election itself), the proposals should not be relied upon and any actions you are considering should be carefully measured.

If you have any concerns or would like to discuss how the potential changes could impact you, please do not hesitate to contact our office.

Disclaimer: The content of this article is general in nature and is presented for informative purposes. It is not intended to constitute financial advice, whether general or personal nor is it intended to imply any recommendation or opinion about a financial product. It does not take into consideration your personal situation and may not be relevant to circumstances. Before taking any action, consider your own particular circumstances and seek professional advice. This content is protected by copyright laws and various other intellectual property laws. It is not to be modified, reproduced or republished without prior written consent.