Labor appears to be on track to win next year’s Federal election, at least according to betting markets. For instance, Sportsbet is offering odds of $1.25 for Labor and $3.50 for the Coalition (as at 19 November 2018). Accordingly, with an ALP government looking increasingly likely, this article considers the impact of key tax and superannuation policies from a personal financial planning perspective.
Labor announced in March 2018 that cash refunds for excess imputation credits to individuals and superannuation funds would be removed with effect from 1 July 2019.
The two groups of investors in Australian shares and/or hybrids who will generally be most affected by these changes are:
- Self-managed superannuation funds with limited sources of contribution income (large industry funds typically have enough members paying tax to make full use of all franking credits and are therefore likely to be relatively unaffected), and
- Individuals with limited sources of other taxable income.
As outlined in a previous article, the dollar impact of this proposal will often be counted in the tens of thousands of dollars, which explains the strong opposition to date, and why this policy will remain in focus through the election campaign.
If implemented, Labor’s policy would likely see a reduced allocation to Australian shares/hybrids in investment portfolios (among other possible responses from SMSFs, such as introducing additional (tax paying) members and/or commuting pensions back to accumulation phase). With many portfolios often overweight to the local share market, increased diversification would be a healthy development – albeit an unintended benefit of Labor’s policy.
Labor has proposed to limit negative gearing to new housing. Net rental losses would continue to be able to be offset against wage income, provided the losses come from newly constructed housing. All existing properties are to be grandfathered, allowing investors to continue to offset their cash flow losses accordingly.
While this policy was originally put forward in the context of improving housing affordability, it has since been clarified this would apply to all investments (e.g. a negatively geared share portfolio).
Existing investors should not be immediately affected due to the grandfathering arrangements. The removal of negative gearing is, however, expected to reduce investor demand for second-hand properties, achieving the policy’s intended effect of putting downward pressure on prices.
Another effect will be to preserve tax benefits for existing investors, whereas the next generation of investors will be denied access to negative gearing (other than on new housing). Despite this, it appears that an existing homeowner (as at start date of the policy) moving to a new home in the future would not be prevented from renting out their former home and claiming negative gearing deductions.
With Sydney and Melbourne property markets in decline, this policy (including the Capital Gains Tax (CGT) changes discussed below) may be deferred to avoid contributing to a deeper downturn in these markets.
Capital gains tax
Labor has proposed to reduce the CGT discount for assets held for at least one year to 25% (currently 50%). All investments made before the policy commences would continue to be eligible for the 50% discount.
While this policy was put forward as a housing affordability measure, similar to the negative gearing changes, it is intended to apply to all asset types.
This provides a clear incentive to bring forward the acquisition of assets prior to the effective date to preserve access to the higher CGT discount.
Based on previous announcements, the following is a summary of what we understand so far regarding Labor’s superannuation polices:
- Non-concessional cap to be reduced to $75,000 (currently $100,000)
- Income threshold for the extra 15% contributions tax for high income earners to be lowered to $200,000 p.a. (currently $250,000 p.a.)
- Catch-up concessional contributions to be abolished
- Deductibility of personal contributions for employed persons to be removed
- Borrowing by SMSFs to be prohibited
- Superannuation Guarantee coverage to be expanded to include both parental leave and salary and wages of less than $450 per month
- Increase in the Superannuation Guarantee rate to 12% ahead of the current timetable.
With Labor apparently intent on further restricting contributions, the current financial year potentially represents a window of opportunity for topping-up super.
Labor intends to introduce a minimum 30% tax rate on discretionary trust distributions from 1 July 2019. While there is not yet much detail, the intention is to stop discretionary trusts being used to distribute income to family members in lower tax brackets.
Wait and see
In our view, it is appropriate to adopt a ‘wait-and-see’ approach before taking any specific action on these proposals, particularly as Labor still needs to win the election and secure parliamentary support for its legislative agenda.
To discuss any aspect of these changes on your personal situation, please contact your BDO adviser.
The information in this document reflects our understanding of existing legislation, proposed legislation, rulings, etc., as at the date of issue. In some cases, the information has been provided to us by third parties. While it is believed the information is accurate and reliable, this is not guaranteed in any way. The information is not, nor is it intended to be, comprehensive or a substitute for professional advice on specific circumstances.
The financial product advice or information in this document is of general nature only and has not taken into account the investment objectives, financial situation or particular needs of any particular person. Before making an investment decision on the basis of the advice above, a prospective investor needs to consider, with or without the assistance of a professional adviser, whether the advice is appropriate in the light of their particular investment needs, objectives and financial circumstances.