On 4 April 2019, the Labor Party outlined their budget reply speech. With a pending Federal Election looming and to keep our clients abreast of how the Labor platform may impact them, it is timely to outline the Labor Party policies that have been announced and the additional comments made in their budget reply speech. Understanding the platform may assist with your future tax planning.
What was announced in the budget reply speech?
In addition to matching increases to the Low to Middle Income Tax Offset announced by the Government, Labor announced their intention to provide more generous income tax cuts to low income earning individual taxpayers.
With significant surplus funds available from the proposed Labor party policy changes, a significant funding program was announced for health, education and the environment.
A lot of the tax reform platform has previously been announced by the Labor party and was therefore not repeated in their budget reply speech.
What reform packages have Labor previously announced?
1. Reduction of the 50% CGT discount concession to 25%.
The Labor party has announced that if elected, the CGT discount concession will be reduced from 50% to 25% effective for all assets purchased from 1 January 2020. All assets purchased before 1 July 2020 will remain eligible for the existing CGT discount concession rate.
The existing CGT discount rate available for superannuation funds will remain unchanged.
2. Removal of refund of imputation credits.
Currently, certain shareholders are eligible to receive a refund of surplus franking credits where their tax rate is lower than the franking credit attached to dividends they receive. For instance, currently, if an individual below the tax-free threshold receives a fully franked dividend, they will receive a refund of the full value of the franking credits.
The Labor Party has announced however that while franking credits will continue to be able to be used to reduce taxable income, it is their intention to remove the refund of surplus franking credits effective from 1 July 2019.
The exception announced relating to the above rule is for individuals on pensions or other Government allowances who will continue to be eligible to receive refunds of franking credits.
The above rule is likely to impact self-funded retirees on low taxable incomes, and superannuation funds who have a tax rate of either 15% or nil (if in pension phase).
3. Changes to negative gearing
In a move aimed at improving housing affordability, the Labor Party has announced their intention to remove negative gearing (i.e. the process of using tax losses generated from an investment to reduce other taxable income).
Labor has announced that the proposed commencement date of this reform will be 1 January 2020 but will not apply to any investment already held at 1 January 2020.
The only exception to the above rule will be the purchase of new property where negative gearing will continue to apply.
4. Taxation of discretionary trusts
Labor has announced a proposal to impose a minimum tax rate of 30% on all distributions made by discretionary trusts to adult beneficiaries. Where the particular beneficiary has a higher marginal tax rate than 30%, they will pay additional top-up tax.
Labor has previously announced their intention for this policy to apply from 1 July 2019.
5. Superannuation amendments
Labor has announced the following proposals:
- Wind back the ability of employees to make tax deductible personal superannuation contributions.
- Reduce the Division 293 income threshold cap (i.e. the threshold at which superannuation contributions will be taxed at 30% rather than 15%) from $250,000 to $200,000.
- Reduce the non-concessional contribution cap from $100,000 to $75,000.
- Progressively increase the rate of Superannuation Guarantee payable for employees.
- Prevent borrowings within superannuation funds.
6. Remove the phased reduction in the corporate tax rate
Labor has already announced that they intend not to continue the phased reduction in the corporate tax rate to 25% by 2027 for all corporate taxpayers.
If you have any further questions, please do not hesitate to contact Tim Olynyk on (03) 9810 0700 or at t.olynyk@banksgroup.com.au.