Proposed Political Changes and what the outcome of the Federal Election potentially could mean to you!
Changes to expenses being claimed:
The Australian Labor Party (ALP) has proposed to restrict deductions able to be claimed on personal tax-related expenses to $3,000 per individual per year.
The Coalition have not proposed to impose a limit, however they propose to obtain more information on what is being claimed at Item D10 – Managing tax affairs.
Changes to the Capital Gains Tax Discount:
The ALP has proposed to reduce the maximum general Capital Gains Tax (CGT) discount from 50% to 25%. However, the following exemptions will apply:
· Grandfathered (existing) investments;
· Investments made by superannuation funds.
The impact of this proposal is as follows:
An asset e.g. a rental property or shares held in a company that were held for more than 12 months would currently receive a 50% discount on any capital gain.
Example:
An investment property purchased for $300,000 on 1st July 2008 was sold on 30th September 2018 for $450,000 by an individual.
The gross Capital Gain is $150,000. As the property was held for over 12 months, the gross Capital Gain is discounted by 50% resulting in tax being paid on the net Capital Gain of $75,000 at the individuals marginal rates of tax.
With the proposed new changes any investment purchased after the date these proposed measures may take effect would only result in a discount of only 25% meaning more tax payable on the disposal of investments.
The Coalition have not indicated that they propose a change to the current 50% general Capital Gains Tax discount.
Changes to negative gearing:
The ALP has proposed to limit negative gearing to investments in new housing, with grandfathering for pre-existing investments.
Example:
An investment property purchased on 1st July 2015 making a net rental loss of $8,000 held by an individual will be able to reduce their other income by this rental loss, resulting in less tax payable. It appears the same scenario will continue if the proposed changes come into effect, providing the investment property purchased was held by the individual prior to the changes coming into effect or if it is new housing purchased after the proposed changes come into effect.
Any investments in shares or existing properties after the proposed changes come into effect will only be permitted to be used to offset investment income tax liabilities, but not against salary and wages.
The Coalition have not indicated that they propose a change to the current negative gearing rules.
Changes to tax refunds from imputation credits:
The ALP has proposed to remove the ability for certain taxpayers to claim excess imputation credits as cash refunds.
Example:
A pensioner who receives minimal income (under $20,000 taxable income) and owns shares in Telstra and BHP would currently receive a tax refund for the imputation credits attached to the Telstra and BHP dividends received.
The Coalition have not indicated that they propose a change to the current ability for eligible taxpayers to receive a cash refund for excess imputation credits.
Changes to tax on distributions received from discretionary trusts:
The ALP has proposed to apply a minimum tax rate of 30% to all distributions from discretionary trusts to adult beneficiaries.
Example:
A trading discretionary trust operated by a family realise a $100,000 taxable profit. The trustees of the trust distribute 25% to each of the adult family members active in the business resulting in taxable income for each of the 4 family members of $25,000. The tax on $25,000 currently amounts to $1,292 each. Under the proposed changes each family member would have tax liability of $7,500. The increase in tax payable to the family group will amount to $24,892.
The Coalition have not indicated that they propose a change to the current taxation of discretionary trust beneficiaries.
Changes to depreciation for small businesses:
The ALP has proposed to introduce an accelerated depreciation system known as the Australian Investment Guarantee from 1 July 2020. This accelerated depreciation for business proposes to immediately allow a 20% write-off for eligible depreciating assets.
The Coalition have announced from 29 January 2019 the $20,000 instant write-off threshold for small businesses will increase to a $25,000 instant write-off until 30 June 2020.
Proposed Superannuation changes
Changes to the non-concessional contributions cap:
The ALP has proposed to lower the non-concessional contributions cap to $75,000 (down from $100,000).
An individual can currently contribute $100,000 per annum into superannuation (where no tax deduction is claimed). With the proposed changes this amount will reduce to $75,000 reducing the ability to increase the balance of your superannuation fund.
The Coalition have not indicated that they propose a change to the non-concessional cap from $100,000.
Changes to the non-concessional contributions cap:
The ALP has proposed to lower the Division 293 tax threshold to $200,000 (down from the current $250,000).
Income earners that receive above $200,000 (adjusted taxable income) will be impacted and required to pay additional contributions tax.
The Coalition have not indicated that they propose a change to the Division 293 tax threshold of $250,000.
Changes to whom can claim a deduction for personal superannuation contributions:
The ALP has proposed to repeal the recent reforms allowing all eligible individuals to claim a tax deduction for personal superannuation contributions.
An individual can currently contribute after tax contributions into their superannuation fund and decide prior to lodging their tax return for the year the contributions were made if they are going to claim a tax deduction for the contributions. For individuals that have spare funds and want to boost the balance of their superannuation fund, the current system offers a great tax planning strategy, with more flexibility than salary sacrificing through your employer. If the proposed changes are to be passed the decision on claiming a tax deduction in your personal tax return effectively will need to be made prior to 30 June and they will need to instruct their employer to salary sacrifice superannuation.
The Coalition have not indicated that they propose a change to the recently legislated relaxation of the personal superannuation deduction rules.
Changes to borrowings in a self-managed superannuation fund:
The ALP has proposed to prospectively restore the prohibition on direct borrowing by self-managed superannuation funds on housing investments via limited recourse borrowing arrangements.
A prohibition on direct borrowings in a self-managed superannuation will limit the investments self- managed superannuation funds will be able to achieve.
The Coalition have not indicated that they propose a change to the existing limited recourse borrowing arrangements within a self-managed superannuation fund.
Changes to compulsory Superannuation Guarantee rates:
The ALP has proposed to end the freezing of the superannuation guarantee rate at 9.5% and fast track the employer compulsory contribution percentage to 12% - although firm dates have not been provided.
This will benefit employees as they will receive more employer contributions into their superannuation funds sooner than is currently expected. The concern will be the cashflow consequences for small business owners. This may put strain on businesses reducing their ability to offer wage increases. Return to Work SA premiums will also increase as premiums are calculated on remuneration which includes employee superannuation guarantee.
The coalition have not indicated a desire to change the current 9.5% superannuation Guarantee rate until the first increase in 2022 (to 10%) beginning the gradual progression to 12% by 2026.
Sources:
- NTAA “The Tax advisors’ Voice Jan/Feb 2018 edition no.288
- Bill Shorten’s Media Release ‘A Fairer Tax System For All Australians – Sunday, 30 July 2017
- https://www.alp.org.au/negativegearing
If you have any questions in relation to these proposed changes or have any concerns, please feel free to contact our office.