In the week of 20-24 August 2018, another round of musical chairs played in Canberra. When the music stopped, the cabinet had changed, and Australia had a new Prime Minister and a new Treasurer. Political pundits picked May 2019 as the most likely date for the next federal election. The Newspoll conducted in late August had Labor as the clear favourite, leading the Coalition in the two-party-preferred measure by 56% to 44%.
With a Labor victory a strong possibility, investors should understand the potential impact on their portfolios.
Labor’s plan to make housing more affordable
Labor’s document “Positive plan to help housing affordability” asserts that:
- The middle class is being priced out of the housing market.
- Ownership rates for young people aged 25-34 have spiralled downwards in recent years from 60% to 48%.
- In all home purchases, first-home buyers make up only 1 out of 7 buyers.
Labor’s response is to reform negative gearing and the capital gains tax discount effective from a yet-to-be-determined date after the next election, a policy which they claim “… will help put the Australian dream of home ownership back within the reach of middle and working class families.”
1. Capital gains tax
Capital gains can be offset against previously incurred but unused (carried over) capital losses and against losses incurred that fiscal year.
Currently, individuals and trusts are also entitled to a 50% discount on the capital gain amount providing they have held the asset for more than one year.
Labor proposes to halve that capital gains discount (CGT) for all assets purchased after a yet-to-be-determined date following the next election, if held over a year, to 25%.
The exceptions (for which the current rules will remain as is) are:
- Investments made before this date
- Investments made by superannuation funds
- Assets of small business owners.
2. Negative gearing
Negative gearing is where investment-related expenses (especially borrowing costs on a property) exceed revenue and the loss is claimed as a tax deduction against other income.
Labor proposes to limit negative gearing to ‘new’ housing from a yet-to-be-determined date after the next election. Investments made before this date will be grandfathered from the impact. Losses from new investments in shares and ‘existing’ properties will still be able to offset other taxable income. These losses can also continue to be carried forward to offset the final capital gain on the investment.
One industry reaction came from RiskWise Property Research, who co-authored a report assessing the impact on property markets of the proposals to amend the CGT discount and negative gearing. They asserted that the unintended consequences would result in “some geographical areas especially those with weak or fragile property markets, [being] adversely impacted more than others.” The report also warns of the consequences in the Sydney unit market being the equivalent of a 1.15% increase in interest rates.
3. Private health insurance
In a radio interview in Adelaide on 18 May, Shadow Health Minister Catherine King outlined that, to cap the rising costs of health insurance,
“Labor will cap [rises in] private health insurance premiums at 2% for the next two years. But we also think the Productivity Commission needs to have a good root and branch look at what’s actually happening in this industry across the board.”
The industry reaction was swift. Dr Rachel David, CEO of Private Healthcare Australia, spoke to the likely unanticipated consequences:
“An arbitrary cap could put some of our regional and employee-based funds at risk of becoming insolvent. And what it will do in terms of flow-on effects is some even of the larger funds, to retain their prudential reserves, will need to freeze the payments they’re making for hospitals and for doctors, which could lead to a cap on nursing wages and a cap on the income of the people who work in hospitals. I know it’s only for two years but expenditure in the health sector is very large, we’re paying out record amounts in claims, and the effects will be felt very quickly.”
4. Superannuation: non-concessional limits, catch-ups and tax deductibility
Speaking on behalf of Labor at the Financial Services Council Political Series Breakfast in Sydney, Labor Senator Kristina Keneally outlined that:
“In 2016 we made it clear that we will oppose the government’s measure to allow catch-up concessional contributions and tax deductibility for personal superannuation contributions. We will also lower the annual non-concessional contributions cap to $75,000 and further lower the high-income super contribution threshold to $200,000.”
Asserting that the proposals lacked logic and equity, Noel Whittaker countered that by taking us back to first principles.
“One would think a major goal of all political parties would be to minimise changes to superannuation in the foreseeable future. Hopefully that would restore trust in the system, and encourage people to use superannuation for its original purpose: funding their retirement so as not to be a burden on the welfare system.”
5. Changes to discretionary trust arrangements
In the “A Fairer Tax System for All Australians” speech in July 2017, Bill Shorten announced the minimum 30% tax on distributions from discretionary trusts:
“Under Labor’s policy, individuals and businesses will still be able to use discretionary trusts. However, the new minimum 30% tax rate on distributions will make sure discretionary trusts cannot be used as a vehicle for aggressive tax minimisation.
“Labor’s policy builds on the reforms of former Treasurer John Howard in the early 1980s. Mr Howard cracked down on artificial income splitting to minors by taxing distributions at the top marginal tax rate. Labor’s policy extends this principle to adult beneficiaries, but at a less punitive rate of 30%.”
Writing in Cuffelinks, Matthew Collins considers that since testamentary trusts are to be exempted from the new proposal, “testamentary trusts may become a useful structure for holding investments for the long term,” and that, “in selected circumstances, the following strategy may be useful:
- Parents lend money to their adult children
- The children make a contribution to superannuation
- The loan is ‘paid back’ out of the estate on the death of the parents.”
6. Removal of excess imputation as cash refunds
Labor’s policy is that it will deny cash refunds for excess imputation credits, with some exceptions.
Cuffelinks has run numerous articles on this issue, commenting on its operation and equity as summarised in “Cuffelinks articles on Labor’s franking policy”. Subsequent articles include Olivia Long’s “SMSFs hit by loss of tax-free status and franking refunds” and Geoff Warren’s paper in this week’s edition.
Depending on individual circumstances, one or more of Labor’s proposed policies may cut sharply into financial plans. While it is worthwhile taking stock now, anyone contemplating changes should note that a lot can happen in eight months of politics, and even if Labor wins, the final policy might be modified.
Vinay Kolhatkar is Assistant Editor at Cuffelinks. This article is general information only and does not constitute financial or tax advice.