The Federal Opposition’s proposed tax changes – with the next federal election being anywhere between five and 14 months away, the federal opposition leader has made many public statements about the tax changes he will introduce.
1. Reforming negative gearing and capital gains tax discount on rental properties
The Federal Opposition leader has provided a strong indication of his stance on negative gearing by stating it should be reformed together with capital gains tax discount, which would raise $37 billion to help balance the budget. Mr Shorten said “We think first homebuyers on a Saturday face unfair competition from investors purchasing their tenth house, and these investors are getting a taxpayer funded concession, when they bid against a family or a couple trying to get their first home.” Labor policy suggests negative gearing and capital gains tax discount favours the wealthy and they will reform them. Exactly what this means is not certain at this stage. It could mean a range of options that could include abolishing the existing regime from wealthy people to every investor.
Editor’s comment: Reforming negative gearing is not a new concept as we all know that Paul Keating (Prime Minister, Australian Labor Party) got rid of negative gearing in 1985 which proved disastrous for the rental market and he was forced to restore it.
2. Discretionary (Family) Trusts
The Federal Opposition leader has proposed that it will introduce a flat 30% tax on Discretionary (Family) Trusts. Currently, the income of a Discretionary flows to the beneficiaries and the beneficiaries are taxed on the income.
Editor’s comment: A Discretionary Trust provides a legitimate structure allowing business owners to protect their family home and other personal assets from a business failure. The timing for announcing this policy without details so far out from the next election makes it difficult for those currently establishing a business to have any certainty regarding the right structure to use. Council of Small Business Australia head, Peter Strong, said the policy was a blunt instrument, and while it was appropriate for the tax office to “go get” wealthy individuals using the trust loopholes to avoid tax, it was wrong to hit everyone.
3. Dividend franking credits
The leader of the Federal Opposition has pledged to axe cash refunds for excess imputation credits paid to individuals and superannuation funds if it wins the next federal election.
Editor’s comment: We don’t believe the existing system where franking credits are refunded to individuals or self-managed super funds are a rort because companies have already paid tax on the money paid to shareholders at 30%. Those with a higher tax rate must pay more tax on their dividend, and those on a lesser tax rate will have the tax paid already paid at the company level offset against their personal tax liability. If the franking credit exceeds their tax liability, the difference is refunded to the shareholder. As governments of all varieties in Australia face the challenge of funding increasing amounts of pension to future retirees relaying on the government’s aged pension, it is curious why there would be a proposal that impacts those who choose to work and save hard to fund their own retirement instead of relying on the government pension. The present federal government has advised “97% of people who get franking credit refunds have a taxable income below $87,000, and more than half of the beneficiaries have taxable incomes below the tax-free threshold”. Included in these figures are self-managed super funds paying pensions to their members.
4. Cap on money paid for assistance with tax affairs
The Federal Opposition leader proclaimed in his 2017 budget reply speech to place a $3,000 cap on the deduction individuals can claim for managing their tax affairs. The evidence cited by the Federal Opposition was that there were some individuals earning large amounts of money (averaging around $2.5 million) who obtained tax deductions for certain items and one of the biggest deductions claimed were payments (averaging over $1 million) to their accountant.
Editor’s comment: Mathematically, the argument behind the cap doesn’t seem to stack up. We understand a person will pay a fair and reasonable amount to their accountant for helping them with their tax affairs, but why would anyone pay an amount beyond what is fair and reasonable just to get rid of their tax bill. Surely keeping that dollar and paying tax on it at, let’s say, 50% would still leave fifty cents in that person’s pocket, which is better than spending a dollar on non-genuine services only to pay no tax and leave nothing in their pocket. Further, the ATO already has a mechanism to counter non-genuine claims under tax legislation’s anti-avoidance provisions.
Written by Chieftains an accounting firm that exists to help business owners increase profits and reduce risks allowing them to astutely provide for their retirement.
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