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17 May 2019 17 May 2019

Will tax policy affect your vote this Saturday?

With only days before we head to the polls to vote in the Federal Election, I’m wondering how many votes will be affected by the tax policies released by the Government and the Opposition during the election campaign.

There have certainly been many headline grabbing tax policies released during the campaign. Some which directly affect individuals and some that are targeted at businesses. It seems to me that the majority of the headline tax issues have come from Labor announcements.

Therefore, I think this is a good opportunity to recap some of Labor’s major tax policy announcements from the election campaign. Of course, no one knows what the outcome will be on Saturday and this analysis may all be irrelevant if the Government is returned to power...

Franking credits

Labor’s proposal to deny refunds of excess franking credits has received more media attention than most of its other tax policy proposals. This is an issue that has the potential to affect voters directly. I think there will be voters on Saturday who may cast their vote on this issue alone. The measure has scared many retirees who have come to rely on refund benefits as part of their retirement income.

If this measure is ever progressed, The Tax Institute will be strongly advocating for maximum transitional relief so that those taxpayers who have structured their financial arrangements in reliance on the current law have the best possible opportunity to restructure their arrangements with minimal financial detriment.

Deductions for managing tax affairs

Labor plans to impose a $3,000 cap on managing tax affairs. The Tax Institute has publicly expressed the view that this proposal is a misguided and inappropriate policy response.

Given the complexity of the current tax system, I’m sure many people legitimately spend more than $3,000 on managing their tax affairs. Taxpayers should be entitled to a deduction for any such legitimate costs.  The Tax Institute will be strongly advocating against this measure should it proceed.

Large business

Labor has decided to take aim at a list of countries on their “Tax Haven Blacklist”.

Labor has announced multiple measures to a crackdown on dealing with the listed tax havens, including royalty integrity measures to stop multinationals getting a tax deduction when they funnel royalty payments into the tax havens.

The Tax Institute has publicly made the point that it is not clear what gaps have been identified by the Labor party to justify this proposal. Simply introducing more legislation into an already extremely complex set of laws will add no value unless the new measures are specifically targeted at some mischief that is not currently captured. Further, it is likely to deter foreign investment.

Labor has estimated that this measure is worth $680 million in the forward estimates and $2.3 billion in the medium term. I question whether Labor’s numbers take into account the potential reduction in foreign investment as a result of their policy.

Superannuation

Labor has announced many superannuation proposals including fast tracking the Superannuation Guarantee to 12% and lowering the annual non-concessional contributions cap to $75,000.

Labor has also announced that it will reintroduce the 10% work test to restrict personal contributions.  Broadly, this will preclude individuals from claiming personal superannuation contributions where they earn more than 10% of their earnings from employee activities.

The Tax Institute has a long history advocating for the removal of the 10% work test and would advocate strongly against any backflip which would result in its reintroduction.

Taxation of trusts

Labor plans to introduce a 30% tax rate for discretionary trust distributions to beneficiaries aged 18 years and older.

The detail of this proposal will have to be considered very carefully. It has the potential to have seemingly unintended outcomes. For example, the policy is stated not to apply to fixed trusts or fixed unit trusts. With a large number of SMSFs investing in non-fixed trusts, it will be very important to carefully consider the definitions used for this proposal. We hope that SMSFs are intended to be carved out of this proposal.

Negative gearing and CGT

Labor plans to reform negative gearing and CGT on residential investment properties. Negative gearing will be limited to new properties and the CGT discount will be halved to 25%. Labor has confirmed that these reforms will not operate retrospectively.

Our understanding is that these Labor proposals will cover all investments not just residential property. However, we will have to wait and see whether this is in fact how the proposal is implemented if Labor wins on Saturday.

Until next week…

By this time next week, we should know which tax policies will be on the agenda going forward. One thing is certain – which ever party wins the election, there will be plenty of changes to deal with in relation to tax policy, administration and law.

As always, we welcome your thoughts via the Vine Feedback inbox.

Kind regards,

Angie Ananda, FTI