With the federal election likely to take place sometime in May, our aim is to proactively keep abreast of the developing policy environment in Australia, to provide information which will allow investors, retirees, and taxpayers to consider possible future actions.
What To Expect?
In recent elections, both major parties have had a focus on super, retirement and personal tax policies. In 2017 the Coalition introduced Age Pension changes and significant super reforms, including limiting the amount that may be held tax-free in the retirement phase. Other more recent super and personal tax-related policies that have changed, or are subject to review, include:
- Protections for small super balances
- Increasing the maximum self-managed super fund (SMSF) member limit, from four to six
- Personal taxation cuts
- The conditions for the early release of super benefits
- The Productivity Commission’s review of the super system.
The table below summarises some of the key proposals outlined by the Australian Labor Party (ALP), which could impact super and tax financial planning strategies, including:
- Reducing the non-concessional contribution limit to $75,000 per annum (p.a)
- Ceasing the catch-up contribution policy
- Tightening the criteria on tax deductibility for personal super contributions
- Ceasing the refund of franking credits
- Limiting negative gearing
- Decreasing the capital gains tax discount percentage by half by bringing it down from 50% to 25%
- Applying a minimum of 30% tax on discretionary family trust distributions.
Other super related proposals outlined by the ALP include:
- Extending compulsory superannuation guarantee to parental leave payments
- Increasing eligibility of superannuation guarantee to include low-income earners over a five-year period
- Increasing the superannuation guarantee as soon as fiscal conditions allow, as opposed to the current gradual increase from 2021.
The table below categorizes these proposals into super-related proposals, tax, and super related proposals and tax-related proposals.
|How does this currently work?||What has the ALP proposed?||What should I consider?|
|Non-concessional contributions||The annual individual non-concessional contribution allowance is capped at $100,000 and if you're under 65, the three-year bring forward provision contribution is $300,000.||Reduce the annual limit to $75,000 p.a. and if you're under 65, the three-year bring forward provision contribution is $225,000.||While contributing more money to super before 30 June won't be appropriate for everyone, it's worth reviewing your superannuation contribution strategy for the year (both pre and post-tax) so that you benefit from the policies currently in place.|
|You should consider a number of factors, including:
|Catch-up concessional contributions||From the 2018/19 year, any unused concessional contributions can be 'carried-forward' and used in future years over a rolling five year period for individuals with a super balance less than $500,000.||Cease the catch-up concessional contribution policy.|
|Concessional personal contributions||The eligibility to make a tax-deductible personal contribution is not impacted by whether 10 per cent of total income is received as an employee (previously known as the 10 per cent test).||Re-introduce the 10 per cent test.||Look to optimize what you can today, to make your hard-earned savings stretch further into the future.|
|Tax and Super Related Proposals|
|Franking credits||When shareholders receive profits from a company in the form of fully franked dividends, they commonly receive 70 per cent of the dividend as a cash payment and the remaining 30 per cent, paid to the ATO as a franking credit. At the end of the year when an individual, SMSF or other tax entities' tax returns are completed, franking credits reduce the overall tax payable. If the tax payable is reduced to below zero dollars, this amount is refunded.||End the refund of franking credits where tax payable is below zero dollars. This proposal will still allow the franking credits to be used to offset tax on other income but will seek to stop dividend credits being returned to investors as a refund. Amendments were subsequently announced on 27 March 2018 to exempt age pensioners who own shares in their personal name from the proposal and provide grandfathering to age pensioners who own shares inside their SMSF.||Consider the proportion of your money invested in Australian shares and if those companies pay franked, or unfranked dividends. In general, as an investor, the higher the percentage of your assets held in Australian equities, the greater the possible impact of the proposal. If necessary, or relevant; consider appropriate forms of non-traditional income investments. From a structural perspective, there may be options and strategies to assist in managing the potential impact of this proposal.|
|Negative gearing||While gearing is when you borrow money to invest, negative gearing is when the income received from the income-producing investment is less than the interest and other expenses paid. Meaning a net loss is incurred, which may then provide a tax deduction.||From a yet to be determined date, new investments may only be used to offset investment income tax liabilities only (i.e. not against salary). Further, negative gearing of property investments will be limited to 'new' housing. Investments made before this date will be grandfathered from the impact.||Firstly, understand where your assets are held and their current tax position. Before purchasing any future investments, consider the most effective structure for your circumstances (e.g. personal name, company, trust, super) and the potential tax implications in the current and proposed tax environments.|
|Capital gains tax||Capital gains tax (CGT) applies to certain assets when they are sold, based on the growth in value since their purchase. The current CGT rules for individuals and trusts subject only 50 per cent of the gains on assets owned for a year or more to the tax.||Halve the CGT discount for all assets purchased after a yet-to-be-determined date, if held over a year, to 25%. Exemptions include: investments made by superannuation funds and assets of small business owners|
|Tax on discretionary family trusts||Income from discretionary trusts may be distributed to eligible beneficiaries on low incomes, where tax is paid at their marginal tax rates.||Introduce a minimum 30 per cent tax rate from 1 July 2019 for any discretionary trust distributions to beneficiaries over age 18 (excluding discretionary testamentary trusts).|
Importantly, at this stage, it should be noted these are party-specific policy proposals which are subject to the final outcome of the federal election. As a result, whichever party is elected, their specific proposals could be subject to further amendments and may not continue in their current form. Investors should consider this information in the context of understanding the potential impacts in order to plan ahead – without acting prematurely and incurring unnecessary expenses and administrative burden.