With the possibility of Labor winning government this year, I thought I would review Labor's well-publicised policies of negative gearing restrictions, reduction of the CGT discount, and ending excess dividend imputation. These policies are wide-ranging and may affect a broad group of taxpayers including individuals, retirees and SMSFs.
If you hold any investments (not just property), you may be subject to Labor's negative gearing restrictions for investors. From a specific date after the next election (ie the changes will not apply retrospectively and all investments made before the specific date will be grandfathered), negative gearing will be limited to newly-constructed housing. However, the restrictions would apply on a global basis for every taxpayer.
For example, Ian obtains a loan to buy shares after Labor's negative gearing restrictions come into effect, shortly after he receives an unexpected windfall and uses the money to purchase 2 properties. One of his properties is positively geared and one is negatively geared, while the shares are neutral. As long as the investment income exceeds total interest and deductions related to all his investments (ie 2 properties plus shares), then Ian will be able to deduct the full amount of the interest and deductions. However, if the total interest and deductions exceed the total investment income, the excess cannot be offset against other non-investment income and needs to be carried forward to be offset against future investment income or capital gains.
As you can see from the example, the policy would benefit those with multiple investments, whether it be shares, managed funds or property. As long as some of the investments are positively geared then there is still a benefit to be had. For the new "rentvesting" generation, this change may impact on any potential investments they may want to make in the future and quarantining of excess losses may need to be factored into investment decisions.
Labor is also planning to reduce the CGT discount for assets held longer than 12 months from 50% to 25%. Again, the changes will apply from a yet-to-be-determined date after the next election and all investments made before this date will be fully grandfathered. This means that if you purchase an investment after the specified date and sell it after 12 months and the capital gains on the investment is $5,000, you could end up paying anywhere between $200 to $500 in excess tax depending on your tax bracket.
Perhaps the most well-publicised policy in Labor's election package is the elimination of excess dividend imputation. Simply, this is denying individuals and super funds the right to receive a cash refund from the ATO if their imputation credits from dividends exceed the tax they have to pay. When this proposal was first announced, it drew the ire from multiple fronts including retirees and SMSF associations. A concession was then made to exempt pensioners which means the policy is now targeted at low-income earners, self-funded retirees not on the pension, and SMSFs without a pensioner member.
What to do now?
Now that you have all the information on potential tax changes that could be coming your way, it may be a good time to start thinking about whether you will be affected by any of the changes. If you think you may be affected, we can help you put plans in place that will minimise the impact. Contact us today if you would like some expert advice.