The Labor Party’s headline policy proposals — which impact negative gearing, capital gains tax and the franking credits regime — have important and varied consequences on Australian investors.
Rami Brass, RSM national head of tax services, told Nest Egg that there are currently three front runners for the top tax issues in the upcoming federal election, and they all stem from the Australian Labor Party’s proposed tax policies. These issues are negative gearing, capital gains and franking credits.
And each proposed change has its own likely winners and losers.
Negative gearing
Under the proposed Labor policy, negative gearing will be limited to new housing. Losses from negatively geared property, other than new housing, will not be allowed to be claimed against salary and wage income but will be able to be claimed against positively geared properties, Mr Brass said.
“The typical mum and dad investor trying to build wealth by borrowing against the equity in their home to fund a single investment will be the biggest losers, as they will no longer be able to help fund the purchase of the asset with the use of tax losses against salary and wage income,” he said.
“The only winners from this proposed policy will be taxpayers who have a mix of negatively and positively geared investments and investments acquired prior to the proposed changes, as they will be more likely to be able to fully utilise deductions against both salary and wage and investment income,” he added. “High-wealth taxpayers are likely to be the winners with this proposed change, with low to middle-income earners losing out.”
Capital gains
Labor is proposing to halve the capital gains tax discount from the current rate of 50 per cent to 25 per cent. The policy will not apply to investments made before the implementation date and will be fully grandfathered, Mr Brass said.
“Individual taxpayers looking to capitalise on existing tax concessions to build their wealth will face challenging times with complex and conflicting changes to existing law,” Mr Brass said.
“With the current ATO focus on individual taxpayers and the deductions claimed in tax returns, individuals who have historically prepared their own returns may have no choice but to seek the services of a suitable qualified tax professional to assist them going forward, which is likely to result in additional and unplanned compliance costs.”
Imputation credits
Finally, Labor has proposed to disallow cash refunds of imputation credits. Under current laws, the imputation credit system allows a taxpayer to be entitled to a credit for the tax paid on dividends paid by companies to shareholders. Under the proposed ALP policy, individual taxpayers will no longer be eligible for refunds of excess franking credits, Mr Brass said.
“Unfortunately, the individual taxpayers likely to be impacted most by the proposed change will be low-income earners which on face value appears unfair and inconsistent with overall ALP policy,” he said.
“Low to middle-income earners will be the biggest losers, losing the ability to offset negative gearing losses against salary and wage income and losing out on cash refunds from excess franking credits.”
Less likely to be impacted
“The proposed ALP changes will have little impact on high-income earners who may have a mix of negatively and positively geared investments against which they can offset negative gearing losses,” Mr Brass said.
“High-income earners will continue to be able to utilise franking credits against tax payable from sources other than dividend income.”
Nestegg's readers also ponder on negative gearing labor policy for 2020.
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