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Super, tax and property: the Labor policies that could affect you

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In theory, the next federal election might be nearly two years away, but with the current febrile atmosphere in the national parliament nobody can rule out the possibility that we might end up going to the polls much earlier.

As a general rule, neither party likes to lay too many of its policy cards on the table too soon – call them hostages to fortune if you like – but federal Labor has, over the past year or two, put out some surprisingly significant announcements around its future tax policy.

So, just in case we have an election sooner rather than later, here’s a round-up of what we currently know about what the Labor party will do in relation to your taxes and superannuation:

General income tax rates

Until  June 30 this year, the top rate of tax for high earners (those with a taxable income of more than $180,000) was 49% because of the impact of the 2% budget repair levy, which had been around since 2014.

The levy expired at the end of the last tax year, meaning that the current top rate is 47%. Under current proposals, that is set to rise to 47.5% in 2019 as the Medicare levy increases to help pay for the National Disability Insurance Scheme.

Federal Labor proposes to permanently reverse the 2% tax cut that accompanied the end of the budget repair levy. This would make the top tax rate for high earners 49.5%, as opposed to 47.5% as currently set by the Coalition.

Higher taxes for some trust beneficiaries

Labor has criticised the use of trusts, stating that they are frequently used as a vehicle for tax avoidance.

This arises because of the ability of trustees to “stream” income to trust beneficiaries.  As a simple example, if business or investment income is earned by an individual, every dollar of that income is taxed at the individual’s marginal rate.

If the income is earned by a trust, the trustee can “stream” some or all of the income to beneficiaries of the trust who might enjoy lower tax rates, or may not be taxpayers at all. So, if there are beneficiaries who are over 18 and have no taxable income – university students, for instance – they can receive distributions from the trust of up to $18,200 (the current tax free amount) without paying any tax at all.

To stop this, Labor proposes to introduce a minimum 30% tax rate on trust distributions, payable by the beneficiary. So, in our example, our unlucky student will no longer pay 0% tax on her trust distribution; instead, she’ll pay 30%.

Changes to capital gains tax

For many years now, taxpayers have enjoyed a generous 50% discount on capital gains arising from the disposal of assets that have been held for more than 12 months. This discount was initially introduced to encourage and reward taxpayers who invest in capital assets for the long term, rather than those who focus on short term “get-rich-quick” profits.

Labor regards the 50% discount as excessively generous and argues that it has helped to stoke the boom in investment property speculation. As a result, it proposes to halve the discount to 25% for all assets acquired after   July 1, 2017.

The end of negative gearing?

Life for property investors has been getting more difficult for a while now. The banks are imposing ever more stringent conditions (and higher rates) on investors who seek to borrow and the government has recently tinkered with some of the tax deductions investors can claim, preventing certain depreciation claims and claims for travel costs incurred in visiting properties.

Labor proposes to go one step further and abolish negative gearing – the practice of offsetting losses on property investments against other income – for all properties except new ones, effective for all property acquisitions made after July 1, 2017. Properties already held at that date would continue to be taxed under the old rules.

And finally, a word of warning …

Policies are often made on the hoof, with an eye on the next day’s headlines, so in relation to all political parties it pays to take statements of what they will do in one, two or five years with a pinch of salt.

Labor’s current policy platform may change before the election and will then be at the whim of the new parliament, and a potentially unruly and unpredictable senate, after the election.

Don’t take the policy positions outlined above as an excuse to hurry into any potentially rash planning without consulting your tax adviser and your financial adviser first.

Written by Mark Chapman

Mark Chapman

Mark Chapman is director of tax communications at H&R Block, Australia’s largest firm of tax accountants, and is a regular contributor to Money.

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