The tax policies of Labor and the Coalition are emerging as a key battleground for the federal election that’s likely to be held in the first half of this year.
In this article, we’ll look at some the key tax policies being proposed by Bill Shorten and Labor if they win government. You can also read about the Coalition’s key tax policies here.
Negative gearing is a term that describes a situation where the expenses associated with an investment property (like loan interest, repairs and maintenance, and depreciation on furniture and appliances) exceed the rental income that the property generates from tenants.
Many property investors use a negative gearing strategy for two reasons:
to reduce the amount of tax they pay. They deduct their investment property expenses and lower their taxable income.
they are hoping that their investment property will increase in value over time to more than offset the shortfall in their investment property in relation to their expenses.
Labor is proposing to limit negative gearing in the future to newly constructed housing only. Currently, investors can negatively gear both new and existing properties. Labor argues that this arrangement favours wealthier Australians and that limiting negative gearing to new properties will increase the supply of housing and make home ownership more affordable for all Australians.
Labor is claiming that any change they make to negative gearing won’t be retrospective. In other words, investors who have already bought existing properties on the basis of using a negative gearing strategy will still be able to do so. The policy change will only affect future investment property purchasers.
Capital gains tax (CGT)
Labor is also proposing to halve the CGT discount for capital gains made on future asset sales. Currently, taxpayers pay capital gains tax on any capital gains they make on an asset that they’ve held for 12 months or more at their marginal income tax rate, less a 50% discount. Labor has announced that they will reduce the CGT to 25%.
As with their negative gearing policy, Labor is claiming that this halving of the CGT discount will not be retrospective. In other words, it will only be applied to assets bought and sold after the date that the rate is changed, not for assets that were bought prior to that date.
Labor is claiming that the current capitals gains tax discount arrangements are too heavily skewed in favour of wealthier Australians.
Labor is also proposing to make changes to Australia’s dividend imputation system. Dividend imputation is a system where shareholders receive a rebate (credit) for the tax that’s already been paid by a company on the dividends they receive. These are known as “franked” dividends.
Currently if a person receives more franking credits than they owe in tax, they’re entitled to a tax refund from the Australian Taxation Office. Labor is planning to abolish cash refunds on franked dividends for all Australians except pensioners. This means that the majority of people receiving franked dividends will only be able to use them to reduce their tax liability, not to generate a cash refund.
Pensioners will remain eligible to receive cash refunds for franked dividends under Labor’s proposed “Pensioner Guarantee” provision.
How we can help
There’s an old saying that ‘the only certainties in life are death and taxes’. Regardless of who wins the next election, it makes sense to implement tax-effective investment strategies.
At Create and Protect Financial Planning, we can help you to do that. We’ll take the time to understand your needs and goals so that we can provide you with the best possible advice.
Call 1300 707 955 or email firstname.lastname@example.org to get started.