Here is a run-down on the six big tax slugs that Shorten is proposing.
- Tax on capital gains to soar
Australia will have one of the highest effective tax rates on capital gains in the world under Shorten’s plan to slash the discount from 50% to 25%.
Presently, an investor who holds an asset (such as shares, property, land, managed funds etc) for more than 12 months pays tax on 50% of any gain. This means that an individual who is paying tax at the highest marginal tax rate of 47% (45% plus 2% Medicare Levy) pays an effective tax rate on a gain of 23.5%.
Under the Shorten plan, only 25% of the gain will be exempted, so that tax at the marginal rate will apply to 75% of the gain. For an investor paying tax at the highest rate of 47%, the effective tax rate will rise to 35.25%. And, with the top marginal tax rate set to rise by a further 2% to 49% (see below), the effective tax rate will be 36.75%.
The tax paid on a capital gain of $100 of $23.50 will increase to $36.75, an effective increase of 56.4%.
The only good news is that the lower discount rate won’t be applied retrospectively so that investments made before the effective date of the change (“sometime after the election”) will be grandfathered.
- Negative Gearing
Negative gearing will be limited to “new housing”. The commencement date will be announced after the election, with investments made before this date grandfathered.
The change will also apply to other assets including shares which are purchased with the assistance of a margin loan, or an investment in a business using borrowed monies. While interest will still be deductible, it will only be deductible to the extent that the income and the allowable deductions are fully offset – you won’t be able to claim a ‘net’ investment loss.
Although grandfathering will help existing investors, all property owners could be impacted if investors withdraw from the market and house prices fall. Rents are expected to increase, as investors will require higher returns to compensate for the loss of the tax benefit.
- Retiree tax
Shorten will stop the re-funding in cash of excess franking credits. Attached to share dividends paid by companies such as Telstra, Woolworths, BHP and the major banks, the franking credits act as a tax offset and if not used, are currently refunded in cash by the Australian Taxation Office.
The change will apply to dividends paid from 1 July 2019.
Known as the “retiree tax”, this change will impact hundreds of thousands of self-funded retirees who are drawing a pension from their SMSF. While the impact will vary, a typical example sees a self-funded retiree drawing a pension of $60,000 pa from their SMSF being around $10,000 pa worse off.
Other low rate or 0% taxpayers, such as a non-working spouse who owns shares, will also be impacted.
In his first backdown, Shorten announced that persons in receipt of a government benefit such as the aged pension, or an SMSF where one member was on a government benefit on 26 March 2018, will be exempted from the change.
- Top tax rate rises to 49%
A legacy of the horror 2014 Abbott/Hockey budget, a temporary “budget repair levy” of 2% was applied to those on the highest marginal tax rate of 45%. The levy expired on 30 June 2017.
Shorten proposes to re-instate the levy by making a permanent increase of 2% to the top tax rate. Under Shorten, the top tax rate will increase to an effective 49% (47% plus 2% Medicare Levy). Taxpayers earning more than $180,000 pa will be impacted.
- Super contributions cap slashed to $75,000
Two years ago, the cap on non-concessional contribution to super – those contributions using your own ‘after tax’ monies – was reduced from $150,000 to $100,000 pa. Now, Shorten proposes to lower this again to just $75,000 pa.
The cut in the cap will reduce the ability to make a large “one-off” contribution to super which may come from the proceeds of selling an asset, an inheritance, a termination payment or some other means. By using the ‘bring-forward’ rule, a person under 65 can make 3 years’ worth of non-concessional contributions in one year. Under current policy, a person can get $300,000 into super in one hit while a couple can potentially contribute up to $600,000. Under Shorten, this will fall to $225,000 or up to $450,000 for a couple.
Clearly, Shorten doesn’t see the super system as a place for savers or the “comfortably off” to invest their surplus funds.
Shorten has also announced that he will abolish ‘catch-up’ concessional contributions and end the deductibility of personal contributions within the concessional cap. The latter can be used by individuals whose employer doesn’t offer salary sacrifice facilities.
- More to pay higher tax rate on super contributions
Known as Division 293 tax, a higher tax rate (effectively 30%) applies to concessional super contributions made by higher income earners. Originally introduced to apply to persons on incomes of $300,000 or more, the threshold was reduced last year to $250,000.
Shorten proposes to lower it to $200,000, meaning that persons on incomes from $200,000 to $250,000 will have their concessional super contributions taxed at 30% (rather than 15%).
For savers and those planning to fund their own retirement (as opposed to the Government), another change that makes the super system less attractive.
Published: Thursday, January 10, 2019