Here is an interesting summary of the potential implications if the ALP are elected into the Federal government this election prepared and kindly provided by Anthony Jackson of Korda Mentha.
Impact of a likely change in Federal Government
Whilst there are no certainties in life, 2019 will most likely see a change in our Federal Government. The Australian Labor Party (“ALP”) have made a number of announcements as to proposed tax changes that will impact high net worth individuals.
As with proposed tax changes, the devil is always in the detail.
I thought it appropriate to outline these announcements made by the ALP and what actions (if any) you may consider taking prior to the May 2019 Federal Election. Accordingly, the comments below are predicated on the election of the ALP in next year’s Federal Election and the policy announcements made to date being legislated.
Removal of Imputation Credit refunds
Clearly this is the policy that has obtained the most air time in the media.
Under a Labor Government, from 1 July 2019 imputation credits for individuals and superannuation funds would no longer be a refundable tax offset. This means that imputation credits can be used to reduce tax payments, but taxpayers will no longer obtain cash refunds for excess imputation credits.
Labor’s policy proposal has so far outlined that it will only apply to individuals and superannuation funds. Income tax exempt charities and Not for Profit institutions with deductable gift recipient status will continue to receive refunds.
Labor’s policy is silent on its application to companies who are able to convert unused imputation credits to tax losses.
The action that you may consider is influenced by the value of your investments inside and outside your Self-Managed Superannuation Fund.
Less than $1.6m per member in Superannuation
If you have less than $1.6 million per member in your Self-Managed Superannuation Fund and you are currently in Pension mode, then this change will result in an absolute increase in the overall tax rate on the income derived by your Fund.
One of the suggested actions to help prepare for this possibility, is to ensure your Fund has absorbed in the current tax year any carry forward Capital Losses.
This will mean that if the ALP does win Government and introduce such changes to the Franking Credit refund rules, the Fund can trigger a taxable capital gain to absorb the excess Franking Credit rather than waste it. The Fund will therefore keep uplifting the cost base of its assets so as to reduce any future capital gains if and when any of the assets of the Fund are in Accumulation mode.
More than $1.6m per member in Superannuation
If you have more than $1.6 million in superannuation, then part of your benefit will currently be in Accumulation mode.
The income generated on these assets is already suffering a 15% tax charge (or 10% capital gains tax rate).
Post 1 July 2019, if you are generating excess imputation credits in your Self-Managed Superannuation Fund for the year, you would simply trigger a taxable capital gain prior to yearend on your investment assets to soak up the excess. For those with excess imputation credits outside of the superannuation system, again you may consider accelerating a tax liability (e.g. triggering a taxable capital gain) prior to year end to soak up that excess imputation credit.
The real question will be whether the change in this tax policy will adversely impact the equity markets?
In light of this, do you consider reweighting your portfolio to more non-Australian equity investments (e.g. foreign equities, fixed interest, property etc.)?
This is of course an investment decision that you must consider in conjunction with your Investment Advisor.
Change in the tax payable on Trust distributions
This one is certainly quite contentious as many clients utilise discretionary trusts.
The ALP proposal is to apply a minimum tax rate of 30% on discretionary trust distributions to adult beneficiaries beginning 1 July 2019.
Currently, such distributions are subject to tax in the hands of beneficiaries at marginal tax rates. This gives clients the opportunity of apportioning investment income from Trusts and taking advantage of lower marginal rates with beneficiaries with respect to investment income.
The proposal is intended to only apply to Discretionary Trusts and is not proposed to apply to Fixed Trusts or Testamentary Trusts, meaning that asset succession plans for clients utilising Testamentary Trusts can remain on foot.
How this may work
If a trust were to make a distribution to an adult beneficiary, the beneficiary would have a minimum rate of tax of 30% on the taxable distribution. If their marginal rate was less than 30% its unlikely they would have this amount refunded.
If you are currently distributing from a discretionary trust to taxpayers at a rate of tax less than 30% (i.e. taxable incomes less than $37,000) then this change will have a financial impact. It will certainly increase the compliance costs of utilising discretionary trusts.
We may consider altering the ownership of assets for clients who use trusts to hold their investments and distribute income to family members. We may even consider looking at making Discretionary Trusts Fixed Trusts.
The current action for you is to review how you are currently using your discretionary trust so that you can prepare for this possible tax change.
Changes to negative gearing
The ALP proposes that from 1 January 2020 negative gearing would be retained only for new housing and assets acquired prior to a pre-determined date. Investments made before this date would therefore be grandfathered and the new rules not apply. Losses from new investments (e.g. shares, existing properties etc.) will be carried forward to only be offset against any capital gain made on the disposal of that investment. It is proposed that all investments would be looked at in totality enabling gains and losses from investments to be consolidated annually.
The question of course is what impact this change will have on an already fragile property market?
If you were considering negatively gearing an investment asset, you should consider taking this action before 1 January 2020 subject of course to the result of the 2019 election.
Changes to Capital Gains Tax rates
The ALP proposes halving the Capital Gains Tax discount, which is currently 50% for assets held for more than one year, to a discount of only 25%. It is proposed that the current 33.3% discount for superannuation funds would remain. The change would also only apply to assets acquired after a specific date (i.e. not a retrospective change).
Do you look at increasing your holdings in investment assets pre the May 2019 election to take advantage of this proposed grandfathering?
The ALP proposes to lower the annual non-concessional contribution cap from the current $100,000 p.a. to $75,000. It also proposes lowering the high-income Superannuation Surcharge payable on taxable contributions for people who earn over $250,000 p.a. to having this tax apply to taxpayers with an annual income over $200,000 p.a.
If you have less than $1.6 million currently in superannuation you should consider accelerating any non-concessional contributions.
As an asset succession strategy, many clients loan funds to their children to then make non-concessional contributions in their own name. The loan is then offset against distribution of assets on the death of the parent. This may be considered if you have adult children with minimal superannuation balances and can afford to provide them with these funds to make such a contribution.
Limit on tax deductibility of taxation fees
The ALP proposes to limit the tax deductibility of Tax Agent fees to $3000 p.a.
The date of the introduction of this change in the law is uncertain. If you are paying more than $3000 p.a. in taxation fees, you should consider a prepayment of this prior to 30 June 2019.
Please note GormanKelly is not aligned with any particular political party, we do not provide financial nor taxation advice, nor do we warrant the accuracy of the information detailed above.
Written by Aldo Galante
For over 30 years, Aldo has been at the forefront of Australia’s fast-evolving property industry. He served as President of the prestigious Australian Property Institute (Vic), providing determinations on rent-reviews and valuations