SALO: Tax update - 2019 Federal Election - Labor proposed tax and super policies

In the lead up to the Federal Election, we have outlined below the key tax and superannuation changes the Australian Labor Party (ALP) has proposed to make if elected to Government.  All proposals discussed may change further in the lead up to the election and are contingent on the ALP forming Government at the election and then successfully passing as legislation through Parliament.

Tax proposals

Excess imputation credits to be non refundable from 1 July 2019

The ALP has announced it will amend the imputation system to make excess imputation credits non-refundable from 1 July 2019 with an exemption for:

• Individuals that are ‘pension or allowance recipients’;

• Self managed superannuation funds with at least one ‘pensioner or allowance recipient’ before 28 March 2018;

• ATO endorsed income tax exempt charities; and

• Not for profit institutions with deductible gift recipient status.

What this means for non pensioner individuals is that the imputation credit attached to dividend payments at either 27.5% or 30% will not be refundable to you if your marginal tax rate is less than these rates.  E.g., An individual receives a $100 grossed-up fully franked dividend with a $27.50 (27.5%) franking credit attached.  The individuals taxable income is less than $37,000 and their marginal tax rate including Medicare Levy is 21%.  Currently, this taxpayer would receive a refund of $6.50 ($27.50 - $21.00) when their tax return was processed by the ATO.  Under the Labors proposal, this refund would not be received.

Negative gearing

From 1 January 2020, the ALP has proposed to prospectively limit negative gearing to new housing investments.  Under this policy:

• Taxpayers can continue to deduct net rental losses against their wage and other investment income provided the losses come from newly constructed housing

• Losses from non new housing investments made after 1 January 2020 can not be deducted against other income.  Any unused losses from this date can be carried forward to offset the final capital gain on the investment.

This proposal applies to all assets (e.g., shares, managed funds, commercial property), not just residential property.  Existing investments made before 1 January 2020 are unaffected by this proposal and can continue to be negatively geared.

Halving the 50% Capital Gains Tax discount

The ALP has proposed halving the current 50% Capital Gains Tax (CGT) discount for holding as asset for greater than 12 months to 25% from 1 January 2020.  This proposal applies to all asset types.  Assets purchased prior to 1 January 2020 are unaffected by this change and can continue to receive a 50% general CGT discount after 1 January 2020.  This proposal does not extend to superannuation funds (they will continue to receive 33.33% discount).

30% minimum tax rate on discretionary trust distributions

The ALP has proposed introducing a 30% minimum tax rate on discretionary trust distributions to beneficiaries aged 18 and over.  Under this proposal, from 1 July 2019, distributions received by adult beneficiaries will be taxed at the greater of their marginal income tax rate and 30%.  As an example – a couple with an adult daughter have set up a discretionary trust to run their business through.  The business makes $90,000 of taxable income that the trust distributes three equal ways to the couple and their daughter of $30,000 each.  Currently, using the individual tax rates, an adult would pay $2,477.79 in tax each.  Under Labors proposal, each individual would pay 30% each on their $30,000 distribution being $9,000.  Therefore each individual would pay $6,522.21 more in tax.

Proposed superannuation changes

Reducing the non-concessional contributions cap

Reducing the non-concessional contributions cap from $100,000 to $75,000.  Assuming that other existing rules remain the same, this would lead to:

• A bring forward cap of $225,000 over three years where an eligible individual’s total superannuation balance just prior to a financial year is less than $1.4 million; or

• A bring forward cap of $150,000 over two years where an eligible individual’s total superannuation balance just prior to a financial year is at least $1.4 million but less than $1.5 million.

Abolishing concessional contributions cap carry-forward

From 1 July 2-018, the concessional contribution’s cap carry forward rules allow individuals to carry forward unused concessional cap amounts for up to five financials years, provided their total superannuation balance just prior to the year in which they want to access the unused cap amounts is less than $500,000.  The ALP has proposed removing the ability for individuals to carry forward unused concessional contributions cap amounts. 

Re-establishing 10% test for personal tax -deductible contributions

Prior to 1 July 2017, individuals wanting to make personal tax deductible contributions to superannuation must:

• Have not been an employee during the income year; or

• Have less than 10% of their assessable income (and reportable fringe benefits and reportable employer super contributions) attributable to employment.

With these conditions removed, most employees became eligible to make personal tax -deductible contributions for the first time.  The ALP has proposed reversing this change.  This would result in most employees again becoming ineligible to make personal tax deductible contributions and being restricted to making any voluntary concessional contributions via increased employer contributions (e.g., salary sacrifice).

Reducing Division 293 tax income threshold to $200,000

Division 293 tax, is additional 15% superannuation contributions tax assessed on super contributions made by an individual whose income for Div 293 purposes is $250,000 or more.  This effectively brings the super contributions tax rate up to 30% for these individuals.  The ALP has proposed bringing the income threshold down from $250,000 to $200,000.  The income threshold includes Fringe benefits and reportable employer superannuation contributions.

Proposed changes to super guarantee

The ALP has proposed ending the existing temporary legislative freeze on the superannuation guarantee (SG) rate (currently 9.5%) and fast tracking the increase in the SG rate to 12% as soon as practicable.  Once the goal of 12% has been achieved, the ALP then proposes to set out a pathway to a 15% rate of SG.  The ALP has also proposed eliminating the $450 per month income threshold below which SG contributions are not required and paying SG contributions on the Federal Government paid parental leave scheme.

Prospectively reintroducing ban on Limited Recourse Borrowings

The ALP believes that super fund borrowing is crowding out first home buyers, increases risks of financial system instability and threatens to undermine the integrity of the superannuation system.  The ALP has proposed prospectively restoring the prohibition on direct borrowing by superannuation funds for housing investments.