Divergent paths on tax policy agenda
IPA maintains an apolitical stance when it comes to assessing policy. Heading into a federal election in 2019, it is important to analyse and evaluate all policy proposals from the major political parties.
We review all proposals from two perspectives: members’ and public interest lens. Most of the time the public interest and members’ interest are aligned, but this is not always the case.
For months now, the two major political parties have been foreshadowing divergent tax changes, but we understand that it will be left to public accountants who fully understand the implications to advise their clients on what it all means.
The impacts will be varied depending on client circumstances, so practitioners will need to tailor how they convey the impacts on a client by client scenario.
A note of caution here, as there is little detail associated with some of the proposed changes. While we have laid out conceptual foundations of policy announcements, the detailed legislation might differ substantially, so we urge members to be mindful of this situation. Labor has not divulged much detail with its policy announcements so the detail can lead to some unexpected surprises.
This is what we know so far (at time of writing):
Labor policies mentioned so far:
1. Maintaining a company tax rate to the full 30 per cent for entities with turnover exceeding $50 million;
2. Higher personal tax rates at the top end and lower personal tax rates at the lower end (i.e. less than $125,000). Labor has indicated that it will oppose phase 2 and 3 of the legislated personal income tax changes (see table below) and intends to reinstate the 2 per cent deficits levy;
3. An increase in the Medicare levy to 2.5 per cent coupled with a more generous Medicare levy arrangement for lower paid workers than currently available;
4. Limit negative gearing on investment properties to newly built residential dwellings from a yet to be determined date after the election. Property investments made before this date will not be affected as they will be grandfathered. Ability to negatively gear other asset classes will also be restricted.
If the total of the interest and deductions related to investments exceed the investment income, the excess will not be able to be used for offset against other non-investment income such as salary and wages. This excess will need to be carried forward for offset against future investment income or capital gains.
It will apply on a prospective global basis to every taxpayer. In other words, it will apply to property and shares alike (and any other relevant asset classes) and it will apply by looking at a taxpayer and assessing their overall investment income as measured against their overall investment interest expenses;
5. Providing landlords who build new residential dwellings an annual subsidy for 15 years of $8,500 a year if the home is let out at 20 per cent below market rates;
6. A halving of the capital gains tax (CGT) discount to 25 per cent for individuals;
7. A minimum tax of 30 per cent on all distributions from discretionary trusts. Currently distributions are subject to tax in the hands of beneficiaries at marginal income tax rates, which could result in a lower effective tax rate for those distributions;
8. A denial of any cash refund in respect of excess imputation credits;
9. A new deduction (the Australian Investment Guarantee) that will enable a 20 per cent deduction in respect of the purchase of any new eligible asset worth more than $20,000;
10. Capping of deductions for managing tax affairs to a maximum of $3,000. This cap will impact individuals, trusts and partnerships. A carve-out is to apply for individual small businesses with positive business income and annual turnover up to $2 million;
11. Whistle-blower rewards for tax evasion; and higher penalties for tax exploitation promoters;
12. Establishment of a new Second Commissioner (Appeals) within the Tax Office;
- Oppose catch up contributions on concessional contributions and tax deductibility on personal superannuation contributions;
- Lower annual non-concessional contribution cap to $75,000 and further lower high-income super contribution threshold to $200,000;
- Increasing the superannuation guarantee to 12 per cent when fiscal circumstances allow;
- Phase out the $450 minimum monthly threshold to receive super guarantee contributions, as part of a broader women’s super-security package; and
- Higher penalties for employers not paying SG.
The Coalition’s current tax policies:
1. Companies with an aggregated turnover of less than $50 million have a reduced company tax rate of less than 30 per cent. Tax cuts already enacted as follows:
27.5 per cent 2019-20 income year
26 per cent for the 2020-21 income year
25 per cent for the 2021-22 income year and for subsequent income years
The government will no longer proceed with implementing its plan to have a 25 per cent tax rate apply to all companies;
2. The government has legislated changes to personal income tax thresholds, as announced in the 2018-19 federal budget. Personal tax changes legislated are to be rolled out in three tranches over the next seven years as detailed in the table above;
3. No change to current arrangements regarding negative gearing of investment property;
4. No change to the CGT discount, which currently sits at 50 per cent for individuals;
5. No change to the current arrangements regarding trust distributions from discretionary trusts. Currently distributions are subject to tax in the hands of beneficiaries at marginal income tax rates, which could result in lower effective tax rate for those distributions;
6. No change to the current arrangements regarding imputation, in particular, full refund of excess imputation credits. This means that excess imputation credits can be converted into cash refunds;
7. Superannuation - While not directly a tax policy, the government is proposing a three-year audit cycle for SMSFs that have a history of good record-keeping and compliance;
8. No changes in relation to depreciation – the $20,000 immediate asset write-off is available to 30 June 2019. There is no certainty beyond this date; and
9. Establish a Small Business Concierge Service within the Australian Small Business and Family Enterprise Ombudsman’s o ce to provide support and advice about the Administrative Appeals Tribunal process. It will also create a dedicated Small Business Taxation Division within the AAT, which will include a supporting case manager, a standard application fee of $500 and fast-tracked decisions to be made within 28 days of a hearing.
Accountants are in a position to disseminate and explain the ramifications. It’s hard to imagine not being impacted in any way.
Examples of some impacts:
- The amount of personal income tax and Medicare levy you will pay;
- The amount of capital gain that will be subject to personal tax;
- Opportunity to continue to convert excess franking credits into cash;
- Altering the tax treatment of trust distributions;
- Ability to offset prospectively investment losses against other income (i.e. negative gearing);
- Ability to claim a full deduction for the cost of managing your tax affairs; and
- Remove deductibility on personal superannuation contributions and lower the annual concessional contribution cap.
Clients would want the implications relevant to their circumstances explained to them in plain English and their accountant is in an ideal position to do this. There are many other election issues that will influence a voter’s preferences and, at the end of the day, it is about making informed choices.
Tony Greco FIPA, general manager of technical policy, IPA