Let’s take a look at what the ALP has in store, should it win the upcoming Federal election.
It’s no secret that Labor has pledged to overhaul Australia’s system of negative gearing.
Labor’s negative gearing policy will mean investors won’t be able to write off the losses from their property investment against the tax they pay on a wage or salary. In the past, Labor proposed this would occur from a date to be determined. In late March, Shadow Treasurer Chris Bowen announced that the new rule would take effect from 1 January 2020.
It’s important to note two features of Labor’s policy on negative gearing
First, it won’t apply to existing property investments – only to those purchased from 1 January 2020.
Secondly, negative gearing will still be available, even after 1 January 2020, but only for newly built dwellings.
Put simply, if you already use negative gearing, nothing changes. Labor’s policy is not retrospective. And negative gearing will still be available for new properties.
Capital gains tax discount
The current 50% capital gains tax discount available when an investment property is sold at a profit will be halved to 25% for properties purchased after 1 January 2020.
These measures are designed to stamp out what Labor refers to as ‘intergenerational tax bias’. The idea is that with less investors to compete against, it will be easier for first home buyers to enter the property market.
What it could mean for you
For the record, the Grattan Institute has crunched the numbers, and believes that Labor’s policy will have a minimal impact on property values and rents, as it will encourage more people to buy a home. The Institute also pointed out that the capital gains tax discount and negative gearing primarily benefit those on high incomes.
While some experts are expecting a rush of investor activity between now and the start of 2020, it’s important to speak with your Mortgage Choice financial adviser before making any decisions. Tax perks should never be the main drawcard of an investment, and if you are considering a rental property, it’s important to consider every aspect of this strategy to be sure it helps you achieve your goals.
Bill Shorten used his budget reply speech to announce tax cuts. Labor is promising to match the Coalition’s $1,080 tax cut for 4.5 million middle income earners. However, he went further with cuts for low income earners.
Under Labor, a person earning $37,000 p.a. would receive a tax saving of $350 after 1 July compared to $255 proposed under the Federal Government’s Budget. Someone on $40,000 p.a. would get back $549 compared to $480 under the Coalition.
Closing down excess dividend imputation credits
If elected, the Labor Government will close down the concession that gives cash refunds for excess dividend imputation credits.
By way of background, Australia’s dividend imputation system prevents double taxation on dividends from company profits. It allows shareholders to use imputation credits (which acknowledge company tax already paid) to reduce their overall tax liability.
Some years after dividend imputation was first introduced, a concession was created that allows some individuals and super funds to receive a cash refund if their imputation credits exceed the tax they owe.
Labor estimates that only 8% of taxpayers will be impacted by this change. Self-managed super funds (SMSF) are a major beneficiary of this concession, with 50% of the benefit flowing to the top 10% of SMSF balances.
Under Labor’s policy, dividend imputation credits can be used to reduce tax, but not to receive cash refunds.
If you are unsure whether this policy initiative could impact your investment portfolio or personal cashflow, please contact my office.
Medicare Cancer plan
A key aspect of Labor’s Budget reply centred on a $2.3bn Medicare Cancer plan to cover out of pocket medical costs for cancer patients, including $1.2 billion to make almost all cancer scans free.
As with the Federal Government’s 2019/20 Budget initiatives, any of the measures Labor is proposing will need to pass through parliament, and of course, they all hinge on the ALP winning the 2019 Federal election.
Proposed hike to super taxes at incomes of $200k
The Labor Party plans to impose additional tax on the super of high income earners.
Super contributions are usually taxed at 15%. The so-called Division 293 tax is an extra 15% tax on concessional (before-tax) super contributions of high income earners. It currently applies to those whose annual income exceeds $250,000. Labor has pledged to drop the income threshold for the Division 293 tax to $200,000.
Cutting the non-concessional cap
Labor plans to cut the annual limit on non-concessional (after tax) super contributions from $100,000p.a. to $75,000. At present, after-tax contributions are banned once your super savings reach $1.6 million, and this will not change under Labor.
Labor has also promised to scrap catch-up measures that allow before-tax super contributions to be used where the annual limit ($25,000) has not previously been reached. At the moment, it’s possible to contribute up to five years’ worth of concessional payments in a single year – which potentially adds up to $125,000 in last minute contributions. Labor’s policy would prevent this.
If you are a high income earner, or you’re heading into pre-retirement mode, it is important to speak with an adviser about how these changes could impact your retirement savings.
For more details on Labor’s Budget response, please contact your local Mortgage Choice Financial Adviser.