Last year, Shadow Treasurer Chris Bowen announced Labor’s view on tax reform and Budget repair. The opposition Labor Party has proposed a number of significant changes to the current tax arrangements.

1. Negative gearing

Negative gearing refers to a situation where investors make an investment (mostly in property) that loses money in the short term (e.g. loan and related costs are greater than rental income), in the expectation of making capital gains in the future.

The investor can deduct any losses associated with the investment from their salary and wage income.

Labor plans to introduce restrictions on negative gearing for investors across the board to all investments, if elected next year. Investments made before this date will be grandfathered from the date the legislation passes.

Investors would need to understand the potential impact of their overall investment portfolio. If the total of the interest and deductions related to investments exceed investment income, the excess will not be able to be used for offset against other non-investment income. This excess will need to be carried forward for offset against future investment income or capital gains.

2. Capital gains tax

If you sell a capital asset, such as real estate or shares, you usually make a capital gain or a capital loss. Capital gains can be offset against previously incurred but unused (carried forward) capital losses and against losses incurred in current financial year.

Currently, individuals and trusts are entitled to a 50% discount on the capital gain amount providing they have held the asset for more than 12 months.

Labor proposes the capital gain tax discount to be reduced for individuals (not super funds or small business assets) to 25% with existing assets to be fully grandfathered from the date the legislation passes.

3. Increase the top marginal tax rate

Labor supports the 0.5 per cent increase in the Medicare Levy but only for those earning over $87,000. It would also reinstate the Budget deficit Repair levy of 2% for those taxpayers with taxable income in excess of $180,000.

4. Labor plans 30% tax on discretionary trust distributions 

Trusts can be legitimately used by individuals and businesses for several reasons, including asset protection and business succession. However, discretionary trusts also have attractive tax advantages.

Labor announced that they will apply a minimum tax rate of 30% on discretionary trust distributions to adult beneficiaries beginning on 1 July 2019. Currently, such distributions are subject to tax in the hands of beneficiaries at marginal income tax rates, which could result in low effective tax rates for those distributions.

5. Removal of imputation credit refunds

Australia’s dividend imputation system was introduced in 1987 to eliminate double taxation on dividends from company profits. Under this system, shareholders can use imputation credits to reduce their overall tax liability. Later, a concession was created allowing some individuals and superannuation funds to receive a cash refund from the Australian Taxation Office (ATO) if their imputation credits exceeded the tax they owed.

Under a Labor government, imputation credits for individuals and superannuation funds would no longer be a refundable tax offset. This means that imputation credits can be used to reduce tax payments, but that taxpayers cannot obtain cash refunds for excess imputation credits.

6. Cap on cost of managing tax affairs

Labor considers capping the amount taxpayers can deduct for the management of their tax affairs at $3,000. This cap would affect individuals, trusts and partnerships. An exemption would be provided for individual small businesses with positive business income and annual turnover up to $2 million.

A possible change in government may lead to far-reaching impacts on individual taxpayers, small business owners and the economy as a whole via these amendments.

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