Your tax life - under Liberal or Labor?

Everyone knew the Budget was the campaign kick-off for the federal elections due in May 2019. They confirmed it with the April 11 announcement - we all go to the polls on the 18th May.

The Liberals kicked off the campaign by showering tax cuts on individuals earning up to $126,000 p.a. and businesses with annual turnovers up to $50 million:

• Personal tax cuts are adjusted until in 2024-2025 when the 37% tax bracket disappears altogether and the 32.5% bracket is reduced to 30% for income between $45,000-$200,000;
• Company tax rate decreases continue until as low as 25% for 2021-2022; and
• Instant asset write - off has increased to $30,000 on a per asset basis.

Other measures were also introduced, a noteworthy one allowing 65 and 66 year olds to continue to make super contributions without needing to meet work tests. Some extra time to top up your self - funded retirement plans.

The so - called "Division 7A integrity rules" (surrounding loans and financial assistance involving companies, trusts and individuals within family groups) have also been deferred for another year until 1 July 2020. Be sure you have your issues identified and action plans in place if you have not already checked and sorted any inadvertent oversights or inaction in addressing the unfavourable tax consequences in this tax mine field.

So if all the preceding opinion polls are an accurate indication ( a poll is just a poll after all), then the Liberals will lose. So what will Labor's policies be?

Whilst obviously a dearth of detail surrounding the tax technical issues, there has still been plenty of tax policy that has been announced and/or confirmed in press releases and media responses.

Income tax

Liberals are adjusting the marginal brackets and rates. Labor is increasing the top marginal rate from 45% to 47%. Throw in the 2% medicare levy and almost half of the income you earn over $180,000 will now go in tax.

Capital Gains Tax

The general discount for assets held more than 12 months is currently 50%. In simple terms, I have always said you will pay effectively pay circa 25% tax on your capital gain (assuming you are on the highest marginal rate). Labor will reduce that discount to 25%. In simple terms, you will now pay circa 37.5% tax on your capital gain.

Don't rush off and start selling assets just yet. Grandfathering applies and assets you currently hold (or now go and acquire) before Labor's "date to be announced" will retain the current 50% discount.

What we are not aware of is whether the reduction of the discount also applies where commercial properties, actively used in business, are sold. The small business concessions operate under their own legislative guidelines but the 50% general discount and 50% active asset discount are integral parts. In simple terms, if continuing to apply in tandem, you will currently pay circa 12.5% tax on your gain.

Negative gearing

Investment losses made on investment properties currently shelter other assessable income. Again, from another of Labor's "dates to be announced", such negative gearing losses will no longer be allowed to shelter salary and wage income.

Labor, under Keating introduced quarantining of negatively geared property losses in the mid-1980s. It lasted 2 years given, among other things, adverse impacts on investment, reduced supply of rental properties, increased rents and ultimately ongoing issues surrounding affordability of housing.

We do know that Labor have said that there will be grandfathering of existing negatively geared property investments and the measures will not apply to geared investments into new properties. However there are a number of areas we are yet to have clarified. Is it just salary and wage income that cannot be offset? Can you offset positively geared investment properties, shares or business income?

Taxation of trusts

Trust laws are well-established in both common law and equity. Income splitting amongst beneficiaries legitimately follows as do favourable tax efficiencies. Investment trusts, practice trusts and service trusts are commonplace structures utilised by many of you.

Under Labor, a minimum 30% tax rate applies to beneficiaries in receipt of trust distributions. Yes, that appears to be the case irrespective of whether, for example, your university age child receives trust income below the $18,200 NIL tax threshold!

Thinking about restructuring now? It's not necessarily a straight forward exercise and Labor say they are introducing these changes effective 1 July 2019!

Franking credits refunds

The dividend franking rules were a Labor initiate that effectively eliminated double taxation on both company profits as well as on post-company tax dividends.

The Liberals under Howard went further to allow refunds where the company tax rate was higher than the shareholder's effective tax rate (i.e. refund of the excess franking credit). An equitable outcome where refunds arise if the 30% credit (reflecting the underlying 30% company tax rate) is passed on to shareholders, such as superfunds, with their lower 15% tax rate.

Labor proposes to deny such refunds. This is bad news for self - funded retirees. Also for lower marginal rate income earners who are trying to build up their wealth for retirement or making share investments to try and pull together enough for a first home deposit. Again, as with Labor's other measures, we are left in the dark as to aspects of interaction with other areas of the tax legislation. Such as how franking credits flow through the new 30% tax regime. Or what happens where your tax refund is primarily a refund of your PAYGW or PAYGI.

Practical upshots

It is difficult to act on expectations of an election outcome yet to be determined. More difficult when we are dealing with policy statements via press releases and media exchanges. Legislation by announcement is has been commonplace across both political parties for some time, but Labor has flagged their major proposed changes and their "dates to be announced" will be followed some 6-9 months later with the actual tax technical legislation.

There will be grandfathering of currently geared assets. Also grandfathering of currently owned capital assets which will remain taxed on application of the current 50% general discount.It means you can simply sit tight on these assts. It might also mean move fast if you want to acquire further capital assets before that "date to be announced" knowing they will be grandfathered. Note that "exchange date" is the relevant acquisition date, not settlement.

Think about your current operating (and investment) trust structures and what alternatives suite your particular circumstances. What does a 30% minimum trust tax rate mean for you compared with your past trust distribution patterns?

Review the amount and manner in which you currently hold your high income yield/full franking share portfolio, especially within the low tax superannuation environment. Perhaps you need to swap these out and instead invest in high growth/low dividend yield shares. This is especially relevant where you have segregated assets to fund pensions and crystallise a NIL tax rate. Franking credits will be wasted as the excess will no longer be refundable. Perhaps those high income yield/full franking shares now need to be held outside of super where your personal tax rates allign more closely with the 30% franking rate.

Much food for thought and discussion, irrespective of who you are voting for on the 18th of May.

About the author

Garry Pammer is a Director of Specialist Accounting & Business Advisory, specialising in providing advice to dentists. Advice not only in respect of taxation and accounting but also planning for your financial wellbeing, superannuation, insurance, practice management and the buying and selling of dental practices.

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