Urgent Tax Update

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URGENT TAX UPDATE

LABOR PARTY TAX POLICY CHANGES

We herein enclose proposed tax policy changes by the Labor Party. In the event they become the government after the next election this is our best interpretation of the policy and obviously may be subject to change on ultimate legislation and industry consultation.

CAPITAL GAINS

The proposal drastically cuts the capital gains tax discount for all assets held longer than 12 months with decrease from 50% to 25% this includes housing, shares and other direct investor assets.

This will effectively take the tax rate from current top rate of 25% tax to 37.5% tax thereon for individuals and trusts.

These amendments will only apply to investments made after implementation date and existing assets will be grandfathered. The assumed implementation date of this change is unknown and may be subject to legislation after the election and/or a more sensible commencement date of 1 July 2019.

CARVE-OUT

There appears to be a carve-out for superannuation funds for the change in the concessions above and tax will continue at 10% capital gains tax rate thereon for holdings greater than 12 months. At this stage, existing small business concessions for capital gains tax haven’t been altered, but watch this space.

NEGATIVE GEARING HOUSING

The proposal is to limit negative gearing to new housing. Taxpayers will be able to deduct net rental losses from salary and wage income – provided the losses come from ‘newly constructed housing’. Existing negative gearing arrangements in place at time of enactment of legislation will not be affected and will continue thereon. Losses from negative gearing property (other than new housing) will not be allowed to be claimed against salary and wages income but can be claimed against other positively geared assets.

SHARES

It appears that the change in negative gearing policy will also apply to investments and shares. Losses from new investments in shares will remain eligible for offset against income directly related to the investment (e.g. dividends, public trust distribution etc.) and positively geared rental income.

In respect to Losses on new investments, Again any excess loss of new investments appear to create a new category of tax loss that can be carried forward against:

1. Future investment income

2. Future rental income

3. Reduction of capital gain on sale on these assets.

As can be seen, a difficult system moving forward will emerge of Grandfathered and new asset/negative gearing classes, some can be claimed for tax, some offset and some carried forward.

The winners, current wealthy investors who are positively geared on investments, seem to be able to offset the loss on new investments going forward.

Working class – salary earning with small investment holdings, with overall total negative gearing, will not be able to offset any new investments negatively geared going forward.

POLICY RAMIFICATIONS

Given the Grandfathering of current investments both for negative gearing and capital gains tax. A class of assets will be created akin to the pre tax capital gains tax asset of 19 September 1985.

Investors will be reluctant to sell or disturb current finance structure thereon on property and investments i.e. shares, unless they are re-balancing portfolio and/or need cash to liquidate the asset.

In our view, this may essentially lead to lack of stock in the market place for ‘used property’ as any replacement property will be subject to the new tax provisions.

So although we are in a market trending downward the impact of a declining market and tough bank lending conditions. In our view, this tax policy in a few years time, may lead to increase in real estate prices due to a lack of stock.

Should you buy real estate before tax proposals are introduced. Again, has the market bottomed? Is potential for short term losses to be balanced against a potential market gains resulting from lack of stock in a few years time.

In our view, we would not be aggressive as to any purchases and defer any pre election purchase. But at the same time, in our view ultimately the market under this policy will result in potential stock shortages in the future, which in our view will not be satisfied by new residential stock on the market.

The take out, keep your existing assets if you can, both from a tax and investment perspective, there appears to be reasonable upside thereon.

TRUST DISTRIBUTIONS – BENEFICIARIES

These new proposals will not apply to testamentary trusts, fixed trusts, charitable trusts and term trusts. The proposed legislation is primarily aimed at family discretionary trusts. The ALP prime focus of a ‘fairer tax system’ and tax paranoia with income splitting therein with disregard to commercial consequences of utilising a discretionary trust.

Trust distributions, going forward will be taxed to a beneficiary such that will be a minimum tax of 30% on all trust distributions irrespective of the beneficiaries tax levels. The practical impact is tax distributions at levels at or between the threshold or below the 30% level, will have a minimum 30% tax rate applied thereon. What will happen with franked dividends distributed as part of the trust distribution, will there be tax credits for these distributions. No detailed explanation of policy at this stage. Ultimately, for new structures going forward, will cause a shift back to company holding vehicles with flexible dividend arrangements to individuals holding shares thereon.

We note, there appears to be no Grandfathering of existing structures in ALP policy here.

FRANKING CREDIT POLICY/SELF MANAGED SUPER FUND (SMSF) (AND OTHER)

The ALP policy will result in the loss of a cash refund both at a SMSF level and/or individual level (some relief) for pensioners at an individual level.

Example – A SMSF – totally in pension phase receiving $100,000 of net share dividends and $42,860 of franked credits under previous regime. There wold be an entitlement to a cash refund of $42,860.

The proposed amendment will have the cash relief at Nil. For those in accumulation phase previous refund $27,860, after ALP amendment – Nil cash refund. But note, the amount that can be offset up to level of other taxable income in – the accumulation phase until tax thereon is exhausted, any excess franking credit is wasted after this.

The above will obviously impact the style of investment that SMSF will adopt as a previously gross franked yield of 6.5% in pension phase will revert to 3.7%, post ALP policy change with loss of franking credits refund. Hence investors will need to review their portfolio investment class mix in shares and hybrid with significant franking credits. The policy change may impact high yielding franked stocks and hybrids in SMSF and trustees may want to reallocate their portfolio style of investments towards different stocks, i.e. high yielding stocks and hybrids with franking credits attached may suffer downward price pressure as trustee’s review their portfolio before and after an ALP Government is returned.

Disclaimer - The material contained in this newsletter does not constitute advice. LCP is not responsible for any action taken in reliance on any information contained in this newsletter. Anyone reading the newsletter should not act upon material contained in this newsletter without appropriate consultation


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I would like to say that Loewy Consulting Partners provide prompt and helpful advice in processing my income tax and in dealing with the Australian taxation office and highly recommend their services to my colleagues. The staff are friendly and always available to assist with knowledgeable advice.

Dr Robert Mansberg
MB BS FRACP, Consultant Physician in Nuclear Medicine, Concord and Nepean Hospitals, Clinical Lecturer, Discipline of Imaging, University of Sydney