The Federal Budget is due on 2 April, and you can bet that an election will be called in May. A major focus in the coming election campaign will be the tax policies of the coalition as opposed to those of Labor. Therefore, in this newsletter I’ll give you a brief overview of Labor’s policies. Keep in mind that there may be new tax policies from the Coalition in the April budget, but that will matter little if they lose the election.
To their credit, Labor has given us plenty of notice of what their tax changes may be, but it’s a long way from the crouch to the leap. First, Labor have to be elected, after which their policies will be subject to intense scrutiny. , Then the legislation will need to be drafted, after which the legislation will have to be approved by Parliament. Obviously, there is no guarantee that all, or even any, of Labor’s proposals will get up.
1. Introduce rules to limit negative gearing
Labor intends to deny the ability to deduct tax losses from all investment assets including property and shares against wages and salary income, unless the property purchased is a brand-new one. I have written before about the problems I see with this proposal. For starters, the way to make money in property is to add value, but how does a novice investor add value to a brand-new property. Second, the restriction is only against wages and salary income, so wealthy investors, will be free to negative gear in the same way as they can now. Labor has promised the new rules will not apply to investors using negative gearing now.
I reckon property spruikers will have a field day. They are still unregulated!!
2. Raise the top marginal tax rate by 2%
The top marginal rate is currently 45% +2% for Medicare levy. This makes a total of 47%. Labour intends to raise the top marginal rate by 2% by restoring the “temporary budget repair levy” which will apply to incomes over $180,000 a year. This will bring the effective top rate for top income taxpayers to 49%.
This may result in a change in behaviour. Some high-income taxpayers may choose to focus on buying an expensive home because your own residence is a tax-free asset – or they may consider borrowing for investment to take advantage of the 49% effective tax deduction. In my view all tax increases are a disincentive to work – I also think it’s unfair for any government to be taking nearly 50% of your income.
3. Halve the capital gains tax discount (CGT) which is currently available at 50%;
Under the present CGT rules there is a discount of 50% provided the asset has been held for over a year. This combined with the effective top rate of 47% gives an effective maximum capital gains tax rate of 23.25% for high income taxpayers. If the discount goes to 25% effective capital gains tax will become 36.75% for high income taxpayers.
Capital gains tax is a disincentive to sell and the higher the rate of CGT the greater the disincentive. Labor has promised their new CGT rules will apply only to assets acquired after the legislation is passed. Some readers have asked whether the new CGT rules could be backdated to say 1 July 2019. My answer is I have no idea – Labor has promised to consult widely, so it’s all speculation at this stage.
4. Deny imputation credit refunds where the total personal tax payable is less than the imputation credit;
This policy has been widely publicised and I maintain my view that, in the unlikely event of it being passed, the tax will raise very little money because it is so easily got around. I will write more about this in future newsletters.
5. Tax the income from discretionary family trusts at a minimum rate of 30%;
This is not been well publicised. Labour intends to impose a minimum tax rate of 30% on distributions from discretionary family trusts. This should not affect people who have the ability to draw a wage from their family trust as they can still take advantage of the $18,200 tax-free threshold, and the 19% marginal rate between $18,200 and $37,000. The people who will be affected will be retirees who have chosen to hold property in family trusts and have been living in the income. They will be taxed at 30% from dollar one. In other words the trust will be taxed like a company but with no franking.
6. Limit deductions for the cost of managing tax affairs to $3,000 per entity (with exceptions for, in particular, small business)
This is a weird one. To limit tax advice to $3000 per entity is ridiculous, but it does open the way to creative accounting. If this legislation is passed expect your tax bill to contain items such as estate planning, bookkeeping and business planning advice. I reckon this one will be laughed out of parliament.