These policies are centred around negative gearing, capital gains tax and the refund of franking credits. If implemented, they may stifle share market investment and effect the housing market, both of which are crucial to the nation’s economy.
The Coalition Government is not proposing any changes to these taxes if re-elected.
Negative gearing has long been used to invest (usually in property) in the hope the asset will increase in capital value over time.
Investors can claim a tax deduction for expenses incurred in the course of earning their investment income, including interest paid on borrowings. For property investors, it also includes depreciation and capital works deductions. If total deductions exceed the income received, the investment is referred to as being negatively geared.
Currently, investors can offset losses resulting from negatively geared investments against their other taxable income, including any salary or wage income.
However, under the ALP’s proposed policy, losses from negatively-geared investments will only be applied to other investment income. If the deductions still exceed the income, the remaining loss can be carried forward to offset future investment income, or capital gains realised from the sale of the investment.
Losses made on newly-constructed houses will still be able to be claimed.
Labor has not advised a start date for this measure, however, losses from investments entered into before the start date will still be able to offset income from all sources, in line with current rules.
Australian investors are also now entitled to reduce the taxable capital gain realised on the sale of assets by 50 per cent, provided they have held the asset for more than 12 months.
However, under the Labor policy, this 50 per cent discount will be reduced to 25 per cent.
Small business assets will be exempted from this change.
Superannuation funds will still be eligible for the current 33.33 per cent discount.
There is also no proposed start date for this measure yet, however, assets acquired prior to the start date will continue to be eligible for a 50 per cent discount.
Labor says these tax changes will increase housing affordability and strengthen the budget. However, this may be outweighed by a significant decline in investment and the subsequent negative economic impact.
Perhaps the most controversial of Labor’s announcements has been its plan to limit tax refunds from excess franking credits from 1 July 2019. This will impact people with share market and private company investments.
When Australian companies pay dividends to shareholders, they can attach a franking credit for tax paid on company profits.
Australian residents, superannuation funds and charities can currently claim a refund if the total franking credits received exceed their tax liability.
Labor intends to limit those who can receive a refund to charities and pensioners. Other individuals and superannuation funds will still be able to apply franking credits to reduce their tax liability, but will not be entitled to receive a refund.
With Labor leading the Liberal-Nationals on a two-party preferred vote 54 per cent to 46 per cent in the latest Newspoll, a change of government before the end of this financial year seems very likely.
Labor’s proposed tax changes may significantly reduce the incentive to invest in property and the share market and should be considered carefully before casting your vote.
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