Labor’s Proposed Tax & Superannuation Policies
By Bill Savellis and MLC
The last few years have been dynamic with constant changes to the laws relating to financial planning and strategies. Specifically, the rules governing superannuation and the personal taxation rates have undergone (and will continue to undergo) significant change.
With an early Federal Budget planned for 2 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.
When reviewing your own financial strategies, the obvious questions you would ask yourself are ‘what does this mean for my financial future?’ and ‘how does this impact my financial plans today?’
Although legislative risk has always been a risk that can unhinge many of our financial plans, it’s important to be able to differentiate between circumstances that require ‘action or inaction’, and when a ‘watch and wait’ approach may be more appropriate.
At Infocus, we understand personal, economic and legislative changes constantly undermine our confidence and, seeds of doubt deter us from taking the steps necessary to better shape our financial future.
To get a better understanding of where you stand, click on the link and schedule an Infocus Strategy Session.
Capital Gains Tax (CGT)
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 any 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.
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.
Non Concessional Contributions (NCC)
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. 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.
Catch-up Concessional Contributions (CC)
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 Concessional Contributions (CC). 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 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)
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
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 (LBRAs)
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.
Super Guarantee (SG)
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.
Super and Parental Leave
Super contributions would be extended to those who are receiving parental leave pay. Little detail has been released in relation to this proposal.
Information published on this website has been prepared for general information purposes only and not as specific advice to any particular person. Any advice contained in this document is General Advice and does not take into account any person's particular investment objectives, financial situation and particular needs. Before making an investment decision based on this advice you should consider, with or without the assistance of a qualified adviser, whether it is appropriate to your particular investment needs, objectives and financial circumstances. Past performance of financial products is no assurance of future performance.