A new federal government could bring with it significant changes to tax and superannuation rules. Some proposed ALP policies may impact on your financial goals, so if a Labor government is elected it may be time to review your overall financial strategy.
Here we outline some key ALP pre-election taxation and superannuation policies and what they may mean for Retirees, Pre-retirees and Young Professionals.
Retirees
Proposed ALP Tax Reforms
1. Removing Dividend Imputation Credits (Franking Credits) [1]
Currently franking credits (credits associated with share dividends where tax has already been paid) can be used as credits against tax liability or granted as cash refunds if:
• You have no taxable income (such as retirees receiving a tax free income from superannuation); or
• Your tax rate is less than 30% (Company tax rate).
The proposed ALP reforms, effective from 1 July 2019, would stop cash refunds for excess dividend imputation credits, excluding anyone receiving a government pension, charities or not-for-profit organisations.
It is estimated that around 30% of cash refunds go to individuals and 60% to SMSFs [2]. We predict that this reform would reduce retirement incomes for many retirees with a self managed super fund (SMSF) in a pension phase that is heavily invested in Australian shares. Potential options to mitigate the effects of the proposed policy include:
• Diversifying shares within your SMSF to reduce the allocation of Australian shares;
• Considering an investment strategy to include investments outside of Australia including Exchange Traded Funds (ETFs) or International Managed Funds with unfranked dividends;
• Developing an investment strategy with a focus on unfranked income yields including some ASX companies, real estate investment trusts or managed funds; or
• Moving away from a SMSF into another fund that may be eligible to receive these refunds.
2. Reducing the CGT discount from 50% to 25% [3]
The proposed ALP policy involves reducing the CGT discount from 50% to 25%. The proposed policy has no set date and excludes:
• Investments made prior to introduction of policy;
• Investments in super funds; and
• Small business assets.
While further policy detail is needed, it is expected that the result of the policy would be a need for more detailed consideration of the timing of holding or selling assets to take into account any negative tax implications which may be avoided through planning.
3. Negative gearing limited to investments in new housing [4]
From 1 January 2020, the ALP has proposed limiting negative gearing to investments in new housing only, with negative gearing to be grandfathered for existing property investments. It would only be possible to deduct losses against your wage income from investments in new property.
As part of the proposed policy, predicted losses from new investments in shares and existing property assets can be offset against tax liability but not wages. Losses can also be offset against future capital gains (at the reduced discount rate).
The implementation of this policy may highlight the need for more detailed cash flow planning and management as losses would not be able to be claimed in the same tax year in which they are incurred, and would need to be stored and set against future investment income or capital gains.
Proposed ALP Superannuation Reforms
1. SMSFs not allowed to enter into new limited recourse borrowing arrangements [5]
As part of its plan for housing affordability and jobs, the ALP proposes banning limited recourse borrowing arrangements (LRBA) for SMSFs.
The use of a LRBA is often an important tool for small business owners to purchase commercial property for use by their business and for business owners to save for their retirement. The introduction of this policy could hamper retirement savings for business owners and leave business owners with lower superannuation balances. Addressing strategies for building retirement savings for business owners may be important if an ALP government introduced this policy.
2. Pension phase earnings limits of $75,000 [6]
The ALP proposes to restrict tax free earnings to $75,000 per annum for retirees. Earnings from income streams above $75,000 in the retirement phase will be subject to 15% tax. Currently earnings from assets in retirement phase (from assets up to $1.6 million) are tax free.
The introduction of this policy may result in the need to plan appropriate income stream management and draw down strategies for super balances to minimise negative tax implications for retirees.
Young Professionals and Pre-retirees
Proposed ALP Tax Reforms
1. Reducing the CGT discount from 50% to 25% [7]
The proposed ALP policy involves reducing the CGT discount from 50% to 25%. The proposed policy has no set date and excludes:
• Investments made prior to introduction of policy;
• Investments in super funds; and
• Small business assets.
While further policy detail is needed, it is expected that the result of the policy would be a need for more detailed consideration of the timing of holding or selling assets to take into account any negative tax implications which may be avoided through planning.
2. Negative gearing limited to investments in new housing [8]
From 1 January 2020, the ALP has proposed limiting negative gearing to investments in new housing only, with negative gearing to be grandfathered for existing property investments. It would only be possible to deduct losses against your wage income from investments in new property.
As part of the proposed policy, predicted losses from new investments in shares and existing property assets can be offset against tax liability but not wages. Losses can also be offset against future capital gains (at the reduced discount rate).
The implementation of this policy may highlight the need for more detailed cash flow planning and management as losses would not be able to be claimed in the same tax year in which they are incurred, and would need to be stored and set against future investment income or capital gains.
3. 30% tax on discretionary trust distributions [9]
It is expected an ALP government would introduce this policy from 1 July 2019. Currently trust distributions enable family members to take advantage of tax-free thresholds and/or lower tax rates of individual beneficiaries through income splitting to reduce the overall tax liability of the trust.
Depending on your income and personal circumstances, this proposed policy could result in significantly higher tax paid by the family group. While further detail is required about this policy, we predict that discretionary trusts with adult beneficiaries who are not working, such as a spouse or adult children at university may be most affected by this policy.
Proposed ALP Superannuation Reforms
1. Non-concessional (after-tax) contributions reduced to $75,000 per annum [10]
Currently non-concessional (after tax) contributions caps are set at $100,000 per annum. The ALP proposes to reduce this cap to $75,000 per annum. If Labor is elected it is recommended that current super contribution strategies be reviewed to avoid penalties. This policy would also make it more difficult to contribute large sums of money to super, making it more important than ever to start your super savings strategy as early as possible. Strategies involving investments outside of super may also be an important consideration for some people planning for a self-funded retirement.
2. Removing catch up concessional (pre-tax) contributions [11]
Catch up concessional or pre-tax contributions, planned to be introduced from 1 July 2019 by the Coalition, enable you to contribute up to five years of super concessional cap amounts in one year (allowed once in your lifetime) when concessional caps are not reached. The concessional contribution cap is$25,000 per annum (and includes any employer Super Guarantee contributions and salary sacrifice contributions). This proposed policy means the allowance to contribute up to $125,000 in one year will be lost. This policy will make it more difficult to contribute large sums of money (such as from the sale of a property or an inheritance) into super in the lead up to retirement and may mean you need to consider your strategies for building your super.
3. Change to high income threshold for super contributions [12}
Currently those on incomes of $250,000 per annum or more pay 30% tax on super contributions (those earning under $250,000 only pay 15% tax on super contributions. The ALP proposes to reduce this threshold to $200,000 per annum if elected. Anyone on a high income would need to consider the implications as part of their overall tax planning and long-term financial goals.
4. Increase in super guarantee payments ahead of schedule from 9.5% to 12% [13]
The ALP proposes to fast track employer Super Guarantee increases from the current 9.5% to 12% as soon as possible.
If Labor is elected, individuals will need to address their superannuation contribution strategies to avoid penalties or tax implications associated with breaching concessional caps. Concessional caps include Super Guarantee contributions and salary sacrifice contributions. For employers, the change to policy will be more far reaching, increasing wage and salary payments for employees which will need to be taken into consideration in business planning.
5. SMSFs not allowed to enter into new limited recourse borrowing arrangements [14]
As part of its plan for housing affordability and jobs, the ALP proposes banning limited recourse borrowing arrangements (LRBA) for SMSFs.
The use of a LRBA is often an important tool for small business owners to purchase commercial property for use by their business and for business owners to save for their retirement. The introduction of this policy could hamper retirement savings for business owners and leave business owners with lower superannuation balances. Addressing strategies for building retirement savings for business owners may be important if an ALP government introduced this policy.
While the outcome of the federal election is yet to be decided, our role will always be to provide enduring financial assistance as it applies to your circumstances.
If you have concerns about proposed changes to superannuation and tax policy, we encourage you to make an appointment to discuss your long term financial needs and goals and strategies to help you get there. Please contact us on 07 3720 1299 or email admin@wealthfundamentals.com.au
Lane Moses Pty Ltd ABN 56 092 186 117 trading as Wealth Fundamentals and its advisers are Authorised Representatives of Fortnum Private Wealth Ltd ABN 54 139 889 535 AFSL 357306.
The information (including taxation) contained within this document does not consider your personal circumstances and is of a general nature only - unless otherwise stated. Wealth Fundamentals strongly suggests that you should not act on it without first obtaining professional advice specific to your circumstances. This information is based on our understanding of legislation at the time of writing. Such legislation may be subject to change. This publication cannot be reproduced in any form without the express written consent of the author.
[1] https://www.alp.org.au/other/dividend-imputation-credits/
[3] https://www.alp.org.au/negativegearing
[4] https://www.alp.org.au/negativegearing
[6] https://www.billshorten.com.au/ensuring_fair_retirement_for_australians
[7] https://www.alp.org.au/negativegearing
[8] https://www.alp.org.au/negativegearing
[10] https://www.alp.org.au/media/1276/2018_alp_national_platform_-_consultation_draft.pdf P15
[11] https://www.alp.org.au/media/1276/2018_alp_national_platform_-_consultation_draft.pdf P15
[12] https://www.alp.org.au/media/1276/2018_alp_national_platform_-_consultation_draft.pdf P15
[13] https://www.alp.org.au/media/1276/2018_alp_national_platform_-_consultation_draft.pdf P15