In general, taxpayers are able to deduct from their assessable income any expenses they incur generating or producing that income. An investment is negatively geared when the cost of owning the asset is more than the return. Negative gearing is not limited to property but can apply to other assets such as shares. In 2016-17, Australians claimed $47.5 billion in rental deductions against gross rental income of around $44.1 billion.
A number of capital gains tax (CGT) exemptions potentially apply to investment property. For Australian resident individuals, a 50% CGT discount applies to net capital gains made on investments held for longer than 12 months. In addition, a taxpayer's main residence is exempt from CGT. As part of this exemption, a taxpayer can be absent from their main residence for up to 6 years and still claim the property as their main residence (assuming they do not treat any other property as their main residence). So, the property can be used as an investment property for 6 years but then sold as the taxpayer's main residence.
Labor's plan seeks to:
There is no policy statement from the ALP on the main residence exemption. The Morison Government had introduced legislation to remove access to the main residence CGT exemption for non-resident taxpayers, but this Bill stalled in the Senate. Chris Bowen told the Australian Financial Review that it will be up to the ALP to work through outstanding tax measures and "iron out any unintended consequences" including the impact on expats and retrospectivity.
A dividend is a shareholder's share of a company's earnings (profits). When a dividend is paid from an Australian company's after-tax profits, these are known as franked dividends and include a franking credit (imputation credit), which represents the amount of tax already paid by the company on the underlying profits that are being paid out in the form of a dividend.
An Australian resident shareholder pays tax on dividends they receive (as dividends are treated as income). If the dividend received is a franked dividend, the shareholder includes the franking credits in their income (i.e., a gross-up occurs) but they can then use the franking credit attached to the dividend to reduce their tax liability. If the credit exceeds their tax liability for the year then they receive a cash refund for the excess amount. For example, an SMSF owns shares in a company. The company pays the SMSF a fully franked dividend of $7,000. The dividend statement says there is a franking credit of $3,000. The $3,000 represents the tax the company has already paid on its profits. This means the profit, before company tax was subtracted, would have been $10,000 ($7,000 + $3,000). The SMSF must declare $10,000 worth of income and will receive the $3,000 as an offset.
The sensitivity of this issue is how the dividend imputation system interacts with the way superannuation is taxed. Currently, income an SMSF earns from assets held to support retirement phase income streams (i.e., a pension), such as dividends from shares, is tax-free. That is, a self-funded retiree in some circumstances pays no tax on the income they earn from dividends. If they pay no tax, then any franking credits are paid as a cash refund.
If the ALP policy comes to fruition, these self-funded retirees lose this cash payment unless they are also Australian Government pension and allowance recipients.
Based on information from Treasury, 85% of the value of franking credit refunds go to individuals with a taxable income below $87,000. That is, 97% of taxpayers receiving refunds have a taxable income below $87,000. And, more than half of those receiving a franking credit refund have a taxable income below the tax-free threshold of $18,200. Around 40% of SMSFs receive a franking credit refund.
Around 1.1 million individuals received a franking credit refund in 2014-15 with more than half of these over the age of 65. And, more than two thirds of refunds to SMSFs are to those whose fund balance per member is greater than $1 million. However, this figure is likely to be diminished by the 1 July 2017 reforms that imposed a $1.6m cap on retirement phase superannuation accounts and tax earnings on accumulation accounts.
The Parliamentary Budget Office has also outlined what behavioural changes they expect to see in the market as a result of making franking credits non-refundable. These include shifting from shares to alternative investment arrangements, and couples shifting ownership of shares from the lower income earner to the higher income earner to utilise the franking credits as a non-refundable tax offset.
The most significant behavioural change is expected to be from SMSF trustees: " The assumed behavioural response for SMSFs in 2019-20 is equivalent to these funds, in aggregate,The alternative, of course, is for SMSFs to change their composition of Australian shares to reduce their holding. The Parliamentary Budget Office also notes that one potential outcome is that SMSFs will increase the number of taxpaying members. "For instance, a couple with an SMSF in the pension phase could invite two additional working-aged children into their fund, allowing them to use their excess franking credits to offset the contributions and earnings tax payable on the assets owned by their children."
There are around more than 690,500 discretionary trusts, also known as family trusts, in Australia. Discretionary trusts are popular as the trustee has the discretion on how to pay the income or capital of the trust to the beneficiaries – beneficiaries do not have an interest in the trust. Income can be apportioned by the trust to the beneficiaries on a discretionary basis, for example, to beneficiaries on a lower income tax bracket. As a result, discretionary trusts are often used to protect assets within family groups, manage succession, and to distribute income tax effectively within that group.
From 1 July 1979, laws were introduced to ensure that distributions to minors were taxed at the top marginal tax rate to prevent trusts distributing funds to children at minimum tax rates.
The ALP reforms address the ability for distributions to be channelled to beneficiaries in low income tax brackets. Instead, a new standard minimum rate of tax for discretionary trust distributions to mature beneficiaries (aged over 18) of 30% will apply.
Mr Shorten told a media conference in April that the ALP had "no plans to increase taxes on superannuation." ALP policy however does recommend changes in a series of areas. These include: