Warnocks February Newsletter - Labor's Proposed Tax Reforms
Negative gearing on property and all other investments
Labor will seek to limit negative gearing to new housing. This will mean that taxpayers will continue to be able to deduct net rental losses against their wage or other income, provided that losses come from newly-constructed housing.
From a date to be determined, losses from new investments in shares and existing properties could still be used to offset investment income tax liabilities.
Labor will halve the capital gains discount for all new assets, acquired after some date to be advised. This will reduce the capital gains tax discount for assets that are held longer than 12 months from the current 50 per cent to 25 per cent. This policy change will not affect investments made by superannuation funds. The CGT discount will not change for small business assets.
Marginal Tax Rates: Labor plans to reinstate the Budget deficit Repair levy of 2% for those taxpayers with taxable income in excess of $180,000.
The proposal is that the cost of managing tax affairs be limited to $3,000 per entity. There will be some exceptions, including those for Small Businesses.
* Non-concessional (after-tax) Contribution Caps will be reduced to $75,000 p.a., down from $100,000.
* The ability to make once-off, catch-up non-concessional contributions of up to $125,000 would be scrapped.
* Concessional super contributions to be taxed at 30% for people earning $200,000 p.a., down from $250,000.
Labor proposes to apply a minimum tax rate of 30% on discretionary trust distributions to adult beneficiaries beginning on 1 July 2019. Currently, such distributions are subject to tax in the hands of beneficiaries at marginal income tax rates, which could result in low effective tax rates for those distributions. We understand that testamentary trusts would be exempt from this measure.
Labor has proposed an Australian Investment Guarantee, to apply from 1 July 2020. This is a form of accelerated depreciation, which would allow businesses to immediately expense 20 per cent of the value of eligible depreciable assets in the first year of all new investments, with the balance depreciated in line with normal depreciation schedules from the first year.
Labor’s original proposal to abolish the net refunding of franking credits to Australian investors other than for charities and endowments was revised in March 2018. Direct investments by welfare pensioners will be exempt; that is those with aged, disability and other Centrelink pensions.
Greater whistle-blowers protections are currently being legislated. Labor also proposes to provide rewards for whistle-blowers who report entities evading tax to the ATO.
The proposed restrictions will apply to all investments on a global basis. In other words, the changes will apply to property and shares and any other relevant asset class. They will look at a taxpayer and assess their overall investment income measured against their overall investment interest expenses. Unused losses cannot be offset against other income, but must be carried forward for offset in future years against future investment income or capital gains from the disposal of the investment assets.
Importantly, all investments made before the date this change comes into effect would not be affected and would be ‘grandfathered’.
Capital gains tax
Labor will halve the capital gains discount for all new assets, acquired after some date to be advised. This will reduce the capital gains tax discount for assets that are held longer than 12 months from the current 50 per cent to 25 per cent. This policy change will not affect investments made by superannuation funds. The CGT discount will not change for small business assets.
Investments made before this date will not be affected by this change and will also be ‘grandfathered’.
Personal Tax
Marginal Tax Rates: Labor plans to reinstate the Budget deficit Repair levy of 2% for those taxpayers with taxable income in excess of $180,000.
Cost of managing tax affairs
The proposal is that the cost of managing tax affairs be limited to $3,000 per entity. There will be some exceptions, including those for Small Businesses.
Superannuation
* Non-concessional (after-tax) Contribution Caps will be reduced to $75,000 p.a., down from $100,000.
* The ability to make once-off, catch-up non-concessional contributions of up to $125,000 would be scrapped.
* Concessional super contributions to be taxed at 30% for people earning $200,000 p.a., down from $250,000.
Discretionary trust distributions
Labor proposes to apply a minimum tax rate of 30% on discretionary trust distributions to adult beneficiaries beginning on 1 July 2019. Currently, such distributions are subject to tax in the hands of beneficiaries at marginal income tax rates, which could result in low effective tax rates for those distributions. We understand that testamentary trusts would be exempt from this measure.
Australian Investment Guarantee
Labor has proposed an Australian Investment Guarantee, to apply from 1 July 2020. This is a form of accelerated depreciation, which would allow businesses to immediately expense 20 per cent of the value of eligible depreciable assets in the first year of all new investments, with the balance depreciated in line with normal depreciation schedules from the first year.
The Australian Investment Guarantee is to be a “permanent measure”, that is, it would not terminate after a number of years. The current Federal Government $25,000 instant asset write-off is now due to cease at 30 June 2020.
Limiting cash refunds of franking credits
Labor’s original proposal to abolish the net refunding of franking credits to Australian investors other than for charities and endowments was revised in March 2018. Direct investments by welfare pensioners will be exempt; that is those with aged, disability and other Centrelink pensions.
SMSFs will also be exempt if they have at least one member who was a welfare pensioner before 28 March 2018. Franking credits will be lost if the total tax payable by a superannuation fund without such a member, is less than the franking credits it receives.
Tax payable by Super Funds is presently based on investment earnings on the accumulation portion of a fund, as well as tax on normal contributions. Income tax exempt charities and not-for-profit institutions with deductible gift recipient status will continue to receive refunds of franking credits.
Whistle blower laws
Greater whistle-blowers protections are currently being legislated. Labor also proposes to provide rewards for whistle-blowers who report entities evading tax to the ATO.
Please don’t hesitate to contact us on 9210 2700 if you have any questions or require any further information.
Disclaimer: The information in this newsletter is provided for informational purposes only and should not be relied upon as specific advice. Warnocks Pty Ltd does not accept any liability in respect of this information.