With an early Federal Budget planned for 2nd April and an upcoming election which, like any election may result in a change of Government, we thought it appropriate to provide an overview of Opposition policies. There are some significant impacts that are likely to be felt across the board, where it only seems that the removal of franking credits is getting any airplay. Most investors are going to be worse off under the opposition’s proposals.
CGT (Capital Gains Tax) discount
The Opposition has announced an intention to reduce the capital gains tax (CGT) discount to 25% for eligible investors. There has been no suggestion of an amendment to the existing general eligibility criteria. Currently, where a CGT asset is disposed of after being held for 12 months by an individual or trustee, Australian investors are entitled to a 50% discount on realised capital gains. This means that only 50% of any realised gain is subject to tax at the individual’s marginal tax rate (MTR). No commencement date has been announced, however, to date it has been announced that the reform will only apply to assets purchased on or after the commencement date and that taxation reform will not apply retrospectively. No change has been proposed to the CGT discount available to superannuation funds.
Personal tax rates
The Opposition has proposed that the top MTR be increased from 45% to 47% (excluding 2% Medicare Levy). This would apply to individuals earning more than $180,000 pa. In addition to this, stages two and three of the legislated tax reforms would be abolished. Stage two, due to take effect 1 July 2022, would see an increase to the income level at which the 37% tax bracket kicks in, from $90,000 to $120,000. Stage three, due to commence 1 July 2024, abolishes the 37% tax bracket, extending the 32.5% tax bracket to income levels up to $200,000.
According to another policy proposed by the Opposition, the ability to negatively gear an investment property would be restricted to new housing. The proposed commencement date has not been confirmed. Grandfathering would apply to any investments made prior to the commencement date. Net rental losses would still be able to be deducted from wage income, provided the investment is a newly constructed property. (Modified rules apply to foreign and temporary residents)
Losses attributable to new investments in shares, as well as existing real property would only be able to be used to offset other investment income tax liabilities. The Opposition has announced that this proposal would not apply retrospectively. Again, a proposed commencement date has not been confirmed.
The Opposition’s policies provide that franking credits would no longer be refundable where dividends are received after 30 June 2019. However, it would still be possible to use franking credits to offset a tax liability and to reduce tax payable to nil. After the initial policy announcement in 2018, the Opposition announced modifications to the proposal to exempt:
- recipients of social security pensions and allowances with individual shareholdings, and
- SMSFs where at least one member was a social security pension or allowance recipient prior to 28 March 2018.
The amendments are referred to as the ‘pensioner guarantee’
Taxation of trust distributions
The Opposition has proposed for a minimum tax rate of 30% to apply to distributions made to adult beneficiaries from discretionary trusts, which would commence from 1 July 2019. The minimum tax rate would not apply to fixed trusts, such as unit trusts. The Opposition has announced that certain types of trusts would be exempt, including testamentary trusts, special disability trusts, and farm trusts.
The non-concessional contribution (NCC) cap would be decreased to $75,000 pa. The Opposition has not announced from which financial year this reduction would be effective.
Currently, the annual NCC cap is $100,000 (applies in 2018/19). Under the existing bring-forward arrangements, an eligible individual may be able to contribute up to $300,000 in a single year 2. If the NCC cap was reduced, the amount available under bring-forward would also reduce to a maximum of $225,000. The Opposition has not announced any proposed changes to the general eligibility criteria for NCCs, or general rules relating to the bring-forward.
Under the Opposition’s proposal, the catch-up concessional contribution (CC) regime would be abolished. Since 1 July 2018, eligible individuals have been able to accrue unused CCs. These amounts currently can be carried forward for up to five years, providing an opportunity to make CCs that exceed the annual cap in a future financial year. The planning opportunities associated with this strategy are significant, particularly in light of the removal of the ‘10% test’ (which took effect on 1 July 2017) which previously limited the ability for a person to claim a tax deduction for a personal contribution (see PDC section below).
Personal Deductible Contributions (PDC’s)
The eligibility requirements to claim a tax deduction for personal contributions would be amended. It is not clear at this stage whether the Opposition’s intention is to reinstate the ‘10% rule’, or whether the ability to claim a deduction would be removed for all individuals.
Division 293 tax (extra tax on super for higher income earners)
The income threshold above which the 15% Division 293 tax is payable would be decreased to $200,000. When Division 293 tax was originally introduced, this income threshold was $300,000. It was subsequently reduced to $250,000.
Limited recourse borrowing arrangements (LRBAs)
Limited recourse borrowing arrangements (LRBAs) would be prohibited. Finer policy details are not known at this point, in terms of whether existing arrangements would be grandfathered. Originally the recommendation to prohibit borrowing within an SMSF was made in David Murray’s Financial System Inquiry, which was released in December 2014.
Currently, employers are not required to make super guarantee (SG) contributions for individuals who earn less than $450 in a month. Under a proposal by the Opposition, this income threshold would be reduced by $100 pa until it no longer exists.
Please share this post with other investors you know so they fully understand the scope of the opposition’s proposals around tax and superannuation.
If you have concerns, please contact us immediately.