The odds are on for tax reform - are you prepared?
Sportsbet has the Australian Labor Party (ALP) at $1.18 favourites to win the next federal election, as at 11 February 2019. Now is the time to start seriously considering the implications of what may be the most substantial tax reform agenda in recent Australian history. It is time to start planning.
The key changes proposed by the ALP that will require proactive consideration and planning are as follows:
placing limitations on negative gearing;
reducing the capital gains tax 50% general discount to 25%;
increasing the top marginal tax rate by 2%;
removing refundable tax offsets for imputation credits;
imposing a minimum 30% tax rate on income earned through discretionary trusts; and
capping deductions for the cost of managing tax affairs to $3,000 per entity.
The proposed limitations on negative gearing, the reduction in the CGT 50% discount and the denial of refundable tax offsets for imputation credits have received a lot of attention. But, the devil (and the opportunities) will be in the detail or, more particularly, the detail of the transitional arrangements.
Here is what we know about these particular proposals to date.
The ALP's proposal is to quarantine losses from negatively geared real property investments and investments in shares so that they cannot be deducted against salary and wages income. Under current tax law, taxpayers can use losses from a negatively geared investment to offset income from any source.
How will the quarantining operate?
It is not yet clear whether under the ALP's policy such losses will be quarantined from salary and wages income only (so, for example, taxpayers could apply losses from a negatively geared investment property to offset dividend income from shares), or whether the investment losses will be quarantined from all other categories of income (so, for example, taxpayers could only apply losses from a negatively geared investment property to offset other rental income).
Carrying forward the losses
The ALP has confirmed that taxpayers can carry forward their quarantined losses to reduce any capital gain arising from their investment.
This will have implications for taxpayers' cash flow and their ability to obtain finance to make the investments.
Newly constructed housing exempt
The quarantining of losses will not apply to 'newly constructed housing'. The meaning of newly constructed housing is not yet known. It is not yet clear whether this will include housing which has undergone significant renovations or knock-down rebuilds.
The ALP has confirmed that the changes will not apply retrospectively. The changes will only apply to investments made after a yet-to-be-determined date and will not impact existing investments. Chris Bowen, the Shadow Treasurer, has stated this date will be announced "well before" the election. It is recommended that this date, once it is announced, be discussed with any clients who are looking to make negatively geared investments in the near future.
Reduction in CGT discount
The ALP is proposing that the CGT discount be halved to 25%. Some key aspects of this proposal, on the information made available to date, are as follows:
Grandfathering: the reduction of the CGT discount will only apply to CGT assets acquired after a yet-to-be-determined date. The ALP has confirmed that the change will not apply retrospectively;
Small business asset exemption: a key feature of the proposal is that the reduction in the CGT discount will not apply to "small business assets". There is no detail yet on what will be a "small business asset" but we anticipate that it may be an asset that that would currently meet the basic conditions for the small business CGT concessions. It will be important to be across the details of this exemption well before the commencement date of the measures as we anticipate there may be structuring choices to make; and
No reduction for superannuation funds: there will be no reduction in the current 33.3% CGT discount for regulated superannuation funds.
Denial of refundable tax offsets for imputation credits
Currently, where a taxpayer's imputation credits (or franking credits) at the end of a financial year exceed their tax liability, the taxpayer receives a cash refund from the ATO. The ALP is proposing that imputation credits return to being a non-refundable tax offset, meaning those taxpayers will no longer receive cash refunds. The key features of this proposal are as follows:
Commencement date: it is proposed that the changes will apply from 1 July 2019. The ALP has stated that this will affect future earnings and franked dividends that flow in the following financial year (ending 30 June 2021). As imputation credits are refunded after the end of a financial year, taxpayers will cease receiving those refunds sometime after 30 June 2020. However, the changes will apply to corporate profits earned, and dividends and imputation credits distributed, during the financial year ending 30 June 2020, unless the ALP introduces alternative transitional provisions;
Adjusting investment decisions: the ALP has stated that "shareholders who may be affected will have the ability to adjust their investment decisions to limit any impact from this policy". It is not yet clear what this means or whether the ALP intend to introduce transitional provisions to allow taxpayers to restructure their investments. For example, a transitional provision may allow taxpayers concessions or rollovers to purchase replacement shares for eligible existing shares that taxpayers receive refunds from under the existing legislative scheme;
Transitional arrangement: the ALP has stated that a refund of imputation credits will continue to be available for individuals on the government age pension or other allowances, or for an SMSF with a member receiving the government age pension, as at March 28, 2018; and
Charities exempt: the changes only apply to individuals and superannuation funds. Charities and not-for-profit institutions are exempt and can continue to claim refunds where imputation credits exceeds their tax liability.
The ALP's proposed changes are significant and will impact how taxpayers invest. With proper advice and planning, the impact may not be as bad as you imagine. This is an apt reminder that governments can always change the rules.
Please do not hesitate to contact us if you have any questions on the above.