A Labor win - your loss?
How will the predicted ALP landslide impact you and your business?
With Liberal frontbenchers across Australia falling on their swords and Bill Shorten licking his lips, Labor are expected to romp home in the 2019 Australian Federal Election. A Winx-like victory if ever there was one - albeit a whole lot less entertaining.
But what exactly are Bill Shorten and his offsiders’ taxation policies, and how will they affect you – both directly and indirectly?
At m+h Private we’ve taken a good look at Labor’s various tax policy announcements. Here are the major ones, and their potential repercussions:
Removal of frank who?
Essentially this means that from July 2019, franking credit refunds from franked dividends will be taken away from all shareholders (pensioners excepted – see below).
Franking credits are credits for company tax already paid that are passed onto - or attached to - dividends received by shareholders. If the shareholder’s marginal tax rate is less than the corporate tax rate, it generally results in income tax refunds for the shareholder (or used to).
While this change affects all shareholders, it’s primarily targeted at the superannuation industry, including self managed super funds (SMSFs), in pension phase. That’s right, a straight shot at self-made retirees.
Shadow Treasurer Chris Bowen justifies this policy by pointing out that ‘Australia is the only OECD country with a fully refundable dividend imputation credit system – a concession which costs the budget more than $5 billion a year.’ This system was originally introduced by Paul Keating to eliminate double taxation on dividends from company profits – something which now looks to be a thing of the past.
Pensioner Guarantee. Pensioners are the exception to these proposed changes to dividend franking. Any individual shareholders receiving an Australian Government pension or allowance will still be able to receive cash refunds. As will SMSFs with at least one recipient of one of these pensions as at 28 March 2018.
Raising the roof to 49%!
A Labor win will result in a return to the top tax rate of 49% - a 2% increase - one of the highest in the world (how do you like them apples!). So if you’re one of more than a million Australians earning more than $180,000 pa, it looks as though you’ll be paying this rate in the not too distant future.
Chris Bowen has said that Labor would “review this when the Budget is back in sustainable surplus.” It sounds like this one could be a future backflip on yet to be enacted policy.
30% minimum tax rate on discretionary trust distributions to adult beneficiaries
Labor argues that the ‘vast majority of wealth in private trusts is held by the wealthiest households’. Bill Shorten maintains that this tax on the income splitting practice of discretionary trusts will ‘close a longstanding [income splitting] loophole’. It remains unclear as to whether or not this tax will be payable in the trust itself or in the hands of its beneficiaries. In reality it means that business owners operating in a trust may now be taxed at a higher rate than companies turning over up to $50 million.
Whilst trusts are an effective tax planning vehicle, there are also other important benefits to ensuring they form part of your business group structure, the main one being asset protection. Trusts form a method of separation whereby business owners can separate assets (i.e. land & buildings) from assets in a trading company to minimise business owners risk. This just one example of many where the advantage of trusts can come into play.
Negative gearing restrictions for real estate and other passive investments
Bowen has stated that ‘Labor will limit negative gearing to newly constructed housing from a yet-to-be-determined date after the next election.’ However, all negative gearing investments before this date ‘will not be affected by this change and will be fully grandfathered.’
Bowen has also said that from a date in the future, ‘losses from new investments in shares and existing properties can still be used to offset investment income tax liabilities. These losses can also continue to be carried forward to offset the final capital gain on the investment.’
SMSFs to be banned from borrowing
Creating further controversy, Labor has signalled that, in a further effort to increase housing affordability, self managed super funds will be banned from borrowing money. Plus foreign investors will incur higher fees and penalties when buying residential property.
Capital gains tax discount reduction, from 50% – 25%
Labor proposes to halve the CGT discount for assets (e.g. shares, real property) that have been held longer than 12 months. This means that any such capital gain made on the sale of such assets will now only receive a 25% discount rather than the present 50% discount. Once again, any investments that you may have made before a yet-to-be-determined date will be fully grandfathered.
The siliver ling is that the ALP has indicated that capital gains tax on investments made by superannuation funds and the small business CGT concessions will not be impacted.
Small and medium businesses to have tax rate reduced
If you’re a small or medium-sized business with a turnover of up to $50 million pa, Labor has promised to have your tax rate reduced to 25% https://www.chrisbowen.net/media-releases/labor-supports-small-business/ by 2021–22. Bowen has said that under a Labour government ‘99% of businesses will receive a tax cut’, and that no business will have its tax rate increased. This rate cut is is in line with existing legislation in place by the current government.
Increased penalties for tax evasion and avoidance
Labor has announced proposed tougher penalties and conditions for multinational and high wealth tax avoiders. These will include:
Stopping companies claiming tax deductions for travel to and from known tax havens
Tightening other debt-deduction loopholes used by multi-national companies
Cracking down on citizen shopping, by requiring Australians with foreign residency to report to the ATO
Increasing penalties for individuals and entities promoting tax evasion and avoidance
Providing protection for whistle-blowers who report tax evading entities to the ATO, including paying a reward of up to $250,000 if tax is paid as a result of the whistle-blowing
Contact m+h Private
Tax can complex at the best of times, and with a possible new federal government in power it’s bound to become a whole lot more complicated. So if you have any questions or concerns, and/or want to explore avenues to mitigate any potential risk to your current wealth strategy, get in touch with m+h Private. We’re Brisbane based experts in all things taxation, so give us a call today on +61 7 3036 7174.