A quick ‘primer’ on ALP tax policy

We recently attended a lecture by the journalist Paul Kelly. A key takeaway was that he thought the election of Bill Shorten and the ALP at the next Federal Election in May 2019, is a foregone conclusion. There seems to be a general consensus building around this conclusion (but you never know…).

Several clients have raised issues about ‘the changes Labor want to bring in’ to our tax laws. To be honest, we haven’t really been paying attention – as it is enough of a challenge to deal with the laws we already have on our books… But given all the interest, we decided to have a look.

Below is a quick summary of what we found:

Remove refundability of franking credits. This one is complicated. It seems to make sense when we look at how much corporate tax is being paid back to super funds. However, in our view, the problem is really that assets supporting super pensions are being taxed too concessionally, and this is really where any changes should be made.

Put a minimum 30% tax on distributions made to adults from trusts. We assume this is meant to stop ‘middle-class tax rorts’ – but, by its very nature, it is going to hit middle-income taxpayers running small businesses through trusts (e.g. earning less than around $130,000 – when their average tax rate moves above 30%. Recall the 32.5% tax rate kicks in at an income of $37,000). This does not seem like good policy. The Government should look elsewhere for its revenue raising.

Incidentally, the removal of franking credit refunds and the minimum tax on trust distributions go hand-in-hand. This effectively places a floor of 27.5-30% on income earned by anyone through a company or trust. This is a huge concern for small business operators.

Reduce the CGT discount from 50% to 25%. We have recently written about this proposed change in some detail: The simple truth about CGT. In our view, this measure is the worse of a number of possible reforms to CGT concessions. The 50% discount was an arbitrary replacement for indexation that came in 1999. An even more arbitrary 25% discount is a bad idea. Bring back logical policy, rather than arbitrary ‘%s’.

Remove negative gearing. We agree that negative gearing has created some anomalies in asset markets and our tax system, but removing it will be an interesting experiment in economic management. The policy seems to be to assist first home buyers, but economic analysis suggests the reform will also increase rents. The ALP will need to balance the interests of renters and first home buyers – as well as the wider economy… Good luck with this one.

Remove the ability for SMSFs to directly invest in residential property. Removing ‘Limited Recourse Borrowing Arrangements’ is again aimed at assisting first home buyers who are apparently being crowded out of the market by SMSF purchases. There may be something to this, but foreign investors are likely to have been the main culprit – together with real constraints on supply.

Increase the top individual tax rate from 45% to 49% for earnings over $180,000. When the Medicare levy, or some other idiot levy like a ‘budget repair levy’, is added to this, the top rate will go to 51-53%. Tax rates above 50% are generally a bad idea. They are psychologically symbolic [this is why $9.99 feels better than $10], and will motivate people to engage in tax minimisation. The real problem is the widening gap between the top individual rate and the falling company tax rate. This gap needs to be reformed, not made wider.

Put a $3,000 cap on deductions for managing your tax affairs. This seems arbitrary, and just bad policy. It is in line with a concerning trend of trying to impede citizens having access to assistance to manage their legal affairs independently of government.

The standard tweaking of super, like decreasing the annual non-concessional limit from $100,000 to $75,000, and removing the ability to make ‘catch-up’ concessional contributions. Seriously, we are so tired of Governments tinkering with these things. This area is far too complicated already.

Increase the compulsory super guarantee from 9.5% to 12% at some point. If you generally agree with the super system and self-funded retirement, then increasing the rate may seem like a good idea. The current guarantee amount is not enough to replace the old age pension. However, this is likely to impose a further cost on employment at a time when the economic landscape looks less than rosy for many SMEs.

If you are interested to learn more about these potential changes, you can find more here: Chartered Accountants analysis

The ‘ALP Manifesto’ can be accessed here 2018 ALP National Platform, for those interested in a light 200-page read.

The information contained in this post is current at the date of publishing – 14 March 2019