With the federal election on the horizon, some believe that there is a good chance that Australia may see a change in government. Should Labor win the federal election and their tax agenda is passed, we will witness one of the most extensive tax transformations since the time of the Hawke government.
In an article from The Australian, they discussed the ALP’s tax agenda and its possible effects on taxpayers. Here are Labor’s main tax proposals and their likely ramifications.
The abolition of franking credit rebates
Labor proposes scrapping any cash rebates that can be claimed from franking credits; typically, by low income-tax paying vehicles such as pension funds.
Franking credits are an important part of an investor’s income strategy, especially for retirees. According to a simulation done at the Australian National University, self-funded retirees may have to increase their savings by up to 9 per cent to compensate for the lost income should this proposal pass.
Here are the following super changes that are being suggested by the ALP:
- No more SMSF borrowing
- No more catch-up concessions
- Non-concessional or after-tax contributions to superannuation will be reduced to $75,000 every year from the present $100,000 per year
- To review the before-tax or concessional super contributions cap of $25,000 per year
CGT to be reduced
Labor has also revealed that they plan to lower the capital gains tax (CGT) discount for assets bought then sold from 50 per cent to 25 per cent.
For retirees with an SMSF above the transfer balance cap of $1.6 million, funds are currently taxed at 15 per cent as an accumulation account. However, if you are below the transfer balance cap, this will not have an impact due to the fact that being in pension mode brings in a zero tax rate. It is best to seek professional CGT assistance to reduce any possible future impacts.
Labor’s plan to reduce CGT to 25 per cent will have a larger impact on investors whose assets are outside of super. When it comes to assets discovered in their personal name, they will get a CGT of only 25 per cent rather than the existing 50 per cent, and individual marginal tax rates will apply.
Limiting negative gearing
Should Labor win, they plan to restrict negative gearing to new housing only. However, they will permit investments made before their yet to be announced date of implementation to remain unchanged. After announcing the commencement date, they will only permit negative gearing on new housing supply.
Minimum 30% tax on trust distributions
The ALP will recommend a minimum 30 per cent tax on trust distributions should they win government. This would apply to beneficiaries who are 18+ years old. They will not tax the trust. Instead, the income tax liability will fall upon the particular beneficiaries of the trust. It will come in a type of a supplementary personal income tax.
Changes in individual taxation levels
Currently, taxpayers in Australia are subjected to a 45 per cent taxation rate plus a 2 per cent Medicare levy on total amounts of over $180,000. The present government has made a proposal to raise this top marginal taxation limit to $200,000.
Should the ALP win, they plan to reject the suggested threshold increase and will keep the existing deficit levy. Thus, they are making a proposal for the top marginal tax rate to be at 49 per cent for the highest level, as opposed to an effective 47 per cent for the Coalition.
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