Warnocks April Newsletter - How the Upcoming Federal Election May Affect You
Welcome to our monthly newsletter. The Federal Election is to be held on 18 May 2019; this is the topic of this newsletter, which is in two parts.
The first part is a short summary of the main tax points of the Coalition’s Budget, which was handed down on 1 April 2019. The second part comprises a comparison and some commentary on the tax policies of the Coalition and Labor.
Personal Tax Cuts 2019 and onwards: Low and Middle Income Tax Offsets are to be increased to $1,080 for singles and $2,160 for couples. The full tax benefit will apply for singles earning up to $90,000. And then a reduced benefit will apply for income up to $126,000 p.a.
Small to Medium Business Tax Cuts: Where turnover is less than $50m p.a., the Company tax rate will be reduced to 25% from 2021-22 and there will be an instant asset write off of up to $30,000 for assets acquired after 7.30 pm on 2 April 2019.
Super (1) Persons aged 65 and 66 years: Don’t have to meet the work test to make voluntary super contributions, both concessional and non-concessional, and can also make up to three years’ of non-concessional contributions under the bring-forward rule.
Super (2) Raised to 74 the Age limit for spouse super contributions
Private Companies, Trusts, Loans and informal Dividends. The Proposed start date for the changes to Division 7A has been deferred to 1st July 2020, to allow for more consultation.
The Coalition wants to flatten tax brackets and reduce the marginal tax rate by 2024. The two stage plan would mean that anyone earning between $50,000 and $200,000 would pay the same rate of tax. This was announced in last year’s budget, but this year the government also promised to reduce the tax rate for those in this broad bracket from 32.5 per cent to 30 per cent.
Labor opposes these more fundamental changes to the income-tax system.
With effect from 2018/19, Labor plans to reinstate the Budget deficit Repair levy of 2% for those taxpayers with taxable income in excess of $180,000.
Labor plans to halve the capital gains discount from 1 January, 2020. 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 1 January 2020 will not be affected by this change and will also be ‘grandfathered’.
The Coalition has no plans to change the existing rate of discount.
Existing negatively-geared properties and newly built properties will be exempted. Labor says the policy is designed to even the playing field for first home buyers. The proposed restrictions will apply to all investments, not just property, 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’.
The government and the housing sector have warned that Labor’s policy would push house prices down and could increase rents. The issue has divided economists. Property analysis firm SQM Research estimated it could cause a 12 per cent drop in house prices, while the Grattan Institute predicts a much more modest impact. “If we look at the value of those tax concessions relative to the size of the market we estimate that the impact on house prices would be in the range of 1–2 per cent,” Ms Wood said.
But she also cautions first-home buyers from getting too excited. “It will give them a better chance, but it is not a silver bullet. There will be fewer investors competing for properties but it’s not going to utterly transform the experience of a first home buyer trying to get in the market.”
PwC’s Jeremy Thorpe said the property downturn is no reason not to implement the changes. “Our view would be that if you are going to change negative gearing actually doing it at a time when investors are not flocking to the market is not a bad time to do it." As for renters, concerns that scrapping negative gearing will push up rent are also disputed.
Labor’s original proposal to abolish the net refunding of franking credits to Australian investors other than for charities and endowments was watered down 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. Labor’s policy would boost the bottom line by $8 billion a year once fully implemented.
1. Non-concessional (after-tax) Contribution Caps will be reduced to $75,000 p.a., down from $100,000.
2. The ability to make once-off, catch-up non-concessional contributions of up to $125,000 would be scrapped.
3. Concessional super contributions to be taxed at 30% for people earning $200,000 p.a., down from $250,000.
Election Policies, Same Old?
Now that the Budget has been handed down we can see the stark differences between the Coalition and Labor's tax policies.With the rosy prospect of there being a budget surplus sometime soon, the government has doubled some tax reliefs and has splashed the cash in many sectors of the community in its pre-election budget.
But, with a suite of major new spending commitments on health and education, Labor is proposing to raise taxes or scrap concessions to pay for it.
Pass the Popcorn! Here Come the Budget Details
The Federal Budget was delivered on 1 April 2019; there is not much of relevance to report. But, just in case you missed it; there are no new taxes!Personal Tax Cuts 2019 and onwards: Low and Middle Income Tax Offsets are to be increased to $1,080 for singles and $2,160 for couples. The full tax benefit will apply for singles earning up to $90,000. And then a reduced benefit will apply for income up to $126,000 p.a.
Small to Medium Business Tax Cuts: Where turnover is less than $50m p.a., the Company tax rate will be reduced to 25% from 2021-22 and there will be an instant asset write off of up to $30,000 for assets acquired after 7.30 pm on 2 April 2019.
Super (1) Persons aged 65 and 66 years: Don’t have to meet the work test to make voluntary super contributions, both concessional and non-concessional, and can also make up to three years’ of non-concessional contributions under the bring-forward rule.
Super (2) Raised to 74 the Age limit for spouse super contributions
Private Companies, Trusts, Loans and informal Dividends. The Proposed start date for the changes to Division 7A has been deferred to 1st July 2020, to allow for more consultation.
The Difference This Time
“There’s a clear philosophical difference between the two parties and I think that is a difference to previous elections,” PricewaterhouseCoopers chief economist Jeremy Thorpe told SBS News. “One party is really saying that they don’t want to see tax rises, they’ll be prudent and fiscally restrained, and the other party is quite clear in saying they need to raise taxes so they can spend more on their priorities.”
Low-Income Earners
A worker earning $35,000 would get a tax offset of $255 for this financial year under the Coalition's package. That would increase to $350 under Labor. Labor has trumped the Coalition when it comes to the lowest-paid workers, offering about 3.7 million Australians earning less than $40,000 up to a 30 per cent higher tax offset than the Coalition. Bill Shorten says that benefits more part-time workers, of which more are women, and cost an extra $1 billion to deliver.
Middle-Income Earners
No matter who is elected next month, anyone earning between $48,000 and $90,000 is in line for a $1080 tax offset which they’ll receive in their 2018-19 tax return. If you earn more than $90,000, but less than $126,000 you’ll benefit at a reduced amount. The big difference between the two sides’ approaches kicks in down the track.The Coalition wants to flatten tax brackets and reduce the marginal tax rate by 2024. The two stage plan would mean that anyone earning between $50,000 and $200,000 would pay the same rate of tax. This was announced in last year’s budget, but this year the government also promised to reduce the tax rate for those in this broad bracket from 32.5 per cent to 30 per cent.
Labor opposes these more fundamental changes to the income-tax system.
High-Income Earners
While higher income earners miss out on the immediate tax offsets, they stand to gain the most under the Coalition’s longer term changes. They include removing the top tax bracket entirely meaning those earning between $120,000 and $200,000 would have their tax rate cut from 37 per cent to 30 per cent.With effect from 2018/19, Labor plans to reinstate the Budget deficit Repair levy of 2% for those taxpayers with taxable income in excess of $180,000.
Capital Gains Tax
Capital gains on assets held for twelve months or longer are generally subject to a fifty percent discount.Labor plans to halve the capital gains discount from 1 January, 2020. 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 1 January 2020 will not be affected by this change and will also be ‘grandfathered’.
The Coalition has no plans to change the existing rate of discount.
Property Buyers
Labor will scrap negative gearing on property investments bought after January 1, 2020, meaning buyers won’t be able to deduct rental losses from their taxable income.Existing negatively-geared properties and newly built properties will be exempted. Labor says the policy is designed to even the playing field for first home buyers. The proposed restrictions will apply to all investments, not just property, 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’.
The government and the housing sector have warned that Labor’s policy would push house prices down and could increase rents. The issue has divided economists. Property analysis firm SQM Research estimated it could cause a 12 per cent drop in house prices, while the Grattan Institute predicts a much more modest impact. “If we look at the value of those tax concessions relative to the size of the market we estimate that the impact on house prices would be in the range of 1–2 per cent,” Ms Wood said.
But she also cautions first-home buyers from getting too excited. “It will give them a better chance, but it is not a silver bullet. There will be fewer investors competing for properties but it’s not going to utterly transform the experience of a first home buyer trying to get in the market.”
PwC’s Jeremy Thorpe said the property downturn is no reason not to implement the changes. “Our view would be that if you are going to change negative gearing actually doing it at a time when investors are not flocking to the market is not a bad time to do it." As for renters, concerns that scrapping negative gearing will push up rent are also disputed.
Self-Funded Retirees: Limiting Cash Refunds of Franking Credits
The Liberals plan to maintain the dividend imputation system that is designed to stop shareholders from paying double tax on company profits.Labor’s original proposal to abolish the net refunding of franking credits to Australian investors other than for charities and endowments was watered down 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. Labor’s policy would boost the bottom line by $8 billion a year once fully implemented.
Superannuation
Labor proposes the following changes in relation to Superannuation:1. Non-concessional (after-tax) Contribution Caps will be reduced to $75,000 p.a., down from $100,000.
2. The ability to make once-off, catch-up non-concessional contributions of up to $125,000 would be scrapped.
3. Concessional super contributions to be taxed at 30% for people earning $200,000 p.a., down from $250,000.
Cost of Managing Tax Affairs
Labor’s 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.
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.Acknowledgement: Much of the commentary above is sourced from a blog of SBS News, updated on 3 April 2019 by Rosemary Bolger.
We are indebted to SBS for their kind invitation to the public to share this commentary.
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.
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.