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14/1/2019

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What Does a Bill Shorten Government Mean For Your Financial Plan

 
Winx, taxes and me having that extra helping of dessert are all pretty sure bets.

I reckon you can add a Federal Labor victory some time soon to that list.
​
What will that mean for your money?  To their credit, the ALP have been quite open about their proposals. Here is what we know:

Labor’s plan to make housing more affordable

A large part of their platform is to ‘make housing more affordable’. According to Labor’s document “Positive plan to help housing affordability”;
 
  • The middle class is being priced out of the housing market.
  • Ownership rates for young people aged 25-34 have spiralled downwards in recent years from 60% to 48%.
  • In all home purchases, first-home buyers make up only 1 out of 7 buyers.
 
Labor’s response is to reform negative gearing and the capital gains tax discount, a policy which they claim “… will help put the Australian dream of home ownership back within the reach of middle and working class families.”.
 
Of course, it’s a mighty effective tax grab too!!
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1. Capital gains tax

How it works currently is that property investments in your own name get a 50% discount on the capital gain you make when they sell your investment property, as long as the property has been owned for a year.

Labor proposes to halve this capital gains discount to 25% for all property purchased after a yet-to-be-determined date following the next election.

The exceptions (for which the current rules will remain as is) are:
  • Investments made before this date
  • Investments made by superannuation funds
  • Assets of small business owners.

2. Negative gearing

Negative gearing is where investment-related expenses (loan interest, maintenance costs etc) on a property are more than the rent.  This difference (the loss) can be claimed as a tax deduction.

Labor proposes to limit negative gearing to ‘new’ housing. 

Cashflow losses from existing property or shares won’t be impacted.

The $64 question is what these two proposals will do to property prices. Remember, according to Labors document, both these measures are designed to make property more affordable.  However, when challenged, Labor say it won’t make much difference. Why bother then? The answer of course is that it raises more tax.

Labor’s policy is here: https://www.alp.org.au/negativegearing

What do you think?  Take our survey.

3. Superannuation: non-concessional limits, catch-ups and tax deductibility

Each year, you can contribute up to $100,000 of after-tax money (known as non-concessional contributions) plus up to $25,000 of before tax money (known as concessional contributions, being either employer or personal contributions that can be claimed as a tax deduction). If you don’t use all your $25,000 concessional cap in any given year, you are able to bring that forward to use in another year. This is called catch-up contributions.

Speaking on behalf of Labor at the Financial Services Council Political Series Breakfast in Sydney, Labor Senator Kristina Keneally outlined that:

"In 2016 we made it clear that we will oppose the government’s measure to allow catch-up concessional contributions and tax deductibility for personal superannuation contributions. We will also lower the annual non-concessional contributions cap to $75,000.”

4. Changes to discretionary trust arrangements

In the “A Fairer Tax System for All Australians” speech in July 2017, Bill Shorten announced the minimum 30% tax on distributions from discretionary trusts:
 
“Under Labor’s policy, individuals and businesses will still be able to use discretionary trusts. However, the new minimum 30% tax rate on distributions will make sure discretionary trusts cannot be used as a vehicle for aggressive tax minimisation.
 
“Labor’s policy builds on the reforms of former Treasurer John Howard in the early 1980s. Mr Howard cracked down on artificial income splitting to minors by taxing distributions at the top marginal tax rate. Labor’s policy extends this principle to adult beneficiaries, but at a less punitive rate of 30%.”

The purpose of this measure is to reduce the value of trusts as a way to distribute income to the lowest tax payer. I’d reckon that this income splitting is why the majority of trusts exist.

​With there being potential capital gains tax implications should you decide to wind up your trust and sell your assets, there’ll be some tough choices to be made should this become Law.

5. Removal of excess imputation as cash refunds

Imputation credits are used to offset tax, and if you pay no tax, they are refunded in cash.
​
Labor’s policy is that it will deny cash refunds for excess imputation credits, with some exceptions including pensioners.

For me this is just meddling with the successful concept of imputation – that when company dividends are paid they are taxed at the individuals tax rate with full credit for the tax already paid by the company.

​This will hurt some retirees in particular.

For every $10,000 of fully franked income you receive, there are $4285 of franking credits attached to it. If they can’t be refunded, that will mean a 30% loss of your total income stream. Ouch!

Here’s a good summary of how it will work in a little more detail.

Taking stock

I understand people’s frustration!! It difficult to make long-term plans when in the back of your mind, you know that the rules will change. 

​There's no doubt, Labor’s proposed policies will hurt some people.  While it is worthwhile taking stock now, anyone contemplating changes should note that a lot can happen in a few months of politics, and even if Labor wins, the final policy might be a lot different to what we see today.

Now might be a good time to be getting some advice.  If you do, make sure it's the right type - fee based, no commissions or other conflicts of interest.

Contact us to learn more.

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​Important - This information is shared with you purely for the purpose of financial education. It is based on generally available information and is not intended to provide you with specific financial advice or take into account your objectives, financial situation or needs. You should consider obtaining financial, tax or accounting advice on whether this information is suitable for your circumstances. To the extent permitted by law, no liability is accepted for any loss or damage as a result of any reliance on this information. See full Terms and Conditions here. 
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