We felt it was worth while mentioning some of what Chartered Accountants Australia and New Zealand (CAANZ) calls “an ambitious tax and superannuation reform agenda” which has been published by the Labor Party in stages over recent years.
The headline reforms relating to removal of imputation tax refunds, negative gearing restrictions and halving of the capital gains tax discount are ambitious enough – but on top of these proposed changes are a myriad of other reforms. Please see the table Income Tax Reforms and Superannuation Reforms for a comparison of the key ALP Tax Policies against the Coalition Tax Policies.
So, an interesting time with regards to tax reform if Labor wins the election in May.
What do the headline reforms mean?
This is where the costs associated with the investment on which a tax deduction is allowed outweigh the income. Most commonly real estate but can be shares. Currently this can be used to reduce your income from other sources – and often obtain a tax refund when your tax return is lodged (especially if the other income is wage income). For example – you have rental income on a property of $20,000. Your expenses against this (interest, body corporate fees, insurance, council and water rates, repairs etc.) amount to $25,000. At present the extra $5,000 in expenses is offset against your other income – under Labor’s proposals you won’t be able to do this. The proposal is that this will only apply to future purchases and not newly built property purchases.
Franking Credits (Imputation Credits)
Currently if a company in which you invest (can be a private company) has paid tax on dividends before they are distributed, then this tax paid is known as a franking credit to the investor. If the investor is not due to pay tax then presently this franking credit will be received as a refund of tax from the ATO (can be a partial refund). Under Labor’s proposals no refund will be allowed.
This reform will be particularly relevant to pension funds (where members are in “pension mode”). These funds often do not pay tax and therefore receive a refund of franking credits from the ATO when lodging their tax return. Under Labor’s proposals this refund will not be allowed.
Capital Gains Tax (CGT) Discount
Currently if an asset has been held for more than one year then a discount for CGT calculation purposes of 50% applies in the calculation of the gain. Labor proposes to halve this discount to 25%. Different calculations apply to superannuation funds. Labor seems to be proposing that this reform will only apply to assets purchased after the implementation – but of course this could change.
Of course, Paul Keating in his time as treasurer of the Labor Party brought in a negative gearing restriction similar to the one proposed by the current Labor Party. I believe it lasted about six months before being withdrawn. Also, Peter Costello and the Liberals floated the idea of taxing trusts the same as companies. That proposal was quickly abandoned. So we will see.
This article was written by Peter Caunt – Senior Director at Imagine Accounting. Peter is one of the original founders of the company. He has over 45 years experience in the accounting industry. He is passionate about helping businesses reach their full growth potential and advises some of our largest clients on their business growth strategies. He can be found at almost all Sydney FC games and loves spending time with his grandchildren.
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