Impact ALP Tax Change Proposals
The impact on retirees of Labor’s proposed removal of franking credits for superannuation funds, reduction in capital gains tax discount and the removal of negative gearing
In a crackdown on what it views as an unsustainable advantage for high-income earners, the Australian Labor Party will introduce reforms to tax laws on 1 July 2019 if wins the next federal election.
These reforms, which include the removal of franking credits and a reduction in the capital gains tax discount, will affect about 8% of taxpayers and about 200 000 self-managed super funds. It is already sparking protest from groups disproportionally affected by the changes, most notably wealthy retirees and the super lobby.
Removing franking credits
Australia’s dividend imputation system allows investors to claim a tax benefit, a much-valued and relied-upon boost to their total return. This is particularly relevant for retirees, as it supports retirement spending increases of up to 6% or the equivalent of a higher balance at retirement by 8%-9%.
Allowed to transfer their superannuation into a retirement savings account, tax-free up to a balance of $1.6 million, imputation credits increase the after-tax value of a fully-franked dividend by 42.8%. The proposed Labor reforms could potentially end, or at least limit, access to imputation credits for Australian retirees.
Dividend imputation has existed since 1987, but refunds on excess franking credits only started in 2001, at a cost of $550 million. It has subsequently increased to more than $5 billion a year, an amount the ALP believes is excessive and detrimental to the average Australian.
Introduced by Keating in 1987, dividend imputation prevents investors being double taxed, once at the company level and again at the individual level. The Howard government then enhanced the scheme by allowing individuals and super funds to claim cash refunds for any excess imputation credits not used to offset their tax liabilities. Labor intends to return to the system introduced by Paul Keating.
Critics view the dividend imputation system as favouring domestic companies and shareholders and as too generous compared to other countries. However, tinkering with the taxation of super yet again after 2017’s tax reforms, could be having a negative impact on client confidence and the stability of the system.
It could also impact Australian businesses, according to Thomas Mousa, Business Services Partner at TLK Partners, as these cash refunds incentivise people to invest locally. “Ending them could see super and self-managed super funds pulling their investment from Aussie companies in favour of better returns elsewhere.”
The impact that restricting access to franking credits would have on retirees is probably underestimated, Mr Mousa adds. “It is likely some people will have to re-prioritise their retirement goals or accept a lower quality of life in retirement due to lower income from their investment portfolio. Professional advice on how to minimise potential income loss is critical.”
Reduction in capital gains tax and negative gearing
Claiming current concessions are stacked in favour of the wealthy and not supportive of investment in new housing, the Labor Party has updated its policy on negative gearing and capital gains concessions.
The key components of the ALP’s policy are a proposal to limit negative gearing to new housing and reduce the capital gains tax discount from its current 50% rate down to 25%. Investments made before the implementation date or by superannuation funds, and assets of small business owners, are exempt from this change.
As it stands, capital gains can be offset against previously incurred but unused capital losses and against losses incurred in a particular fiscal year. Individuals and trusts are also entitled to a 50% discount on the capital gain amount providing they have held the asset for more than year.
Negative gearing is when an investment property’s net rental income (after deducting expenses) is less than the interest on the borrowed funds. While common for property investing, negative gearing can also be used for other financial instruments such as shares and bonds. The loss is claimed as a tax deduction against other income.
On face value, the policy seems advantageous to mature investors who may have a combination of positively and negatively geared properties, whereas most working Australians with one negative geared property will miss out.
Surveys indicate that about half of Australians are worried about their finances, yet the vast majority has never received any professional advice. “If you are concerned about the impact changing tax laws might have on your investments and retirement income, seek help,” Mousa urges. “Understanding what you’re up against is the first step in making the right financial decisions.”
Thomas Mousa is a partner at TLK Partners, a company that takes care of the wealth management and accounting needs of ordinary folk, small and medium businesses, and high value individuals. TLK Partners, Chartered Accountants and Wealth Management Company website, or call (02) 8090 4324.
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