Labor’s big policy platform has created a number of points of difference between the major parties on superannuation and tax. The Coalition outlined big personal tax changes in the Budget and a significant first home buyer initiative late in the day. Here is what investors need to know heading into next Saturday’s election.
Housing affordability. The Coalition has produced several initiates aimed at helping first home buyers over the past few years. It introduced the First Home Saver Scheme, which allows people to save for their first home deposit in their super fund – thus enjoying concessional tax treatment.
It restricted foreign investor access to the local residential property market.
And on Sunday, the Prime Minister launched the First Home Loan Deposit Scheme. To start on 1 January next year, the scheme will be available to buyers who have been able to save a deposit of at least 5 per cent and who earn up to $125,000 ($200,000 for a couple).
Prime Minister Scott Morrison said the scheme would mean first home buyers won’t need to save the full 20 per cent deposit for a home purchase. The value of homes that can be purchased under the scheme will be determined on a regional basis, reflecting the different property markets across Australia.
The Government will invest $25 million in the National Housing Finance and Investment Corporation to establish the scheme, which would take the form of a guarantee. The government expects to provide about $500 million of guarantees.
The scheme would be capped at 10,000 loans a year – estimated to be about 10 per cent of the first home buyer market. The support would stay in place for the life of the loan.
The government said the scheme would give preference to working with smaller banks and non-bank lenders.
Labor said it would match the commitment. It has also announced that it will provide greater incentives for developers of build-to-rent housing, in a bid to provide greater certainty and stability for long-term renters.
Superannuation. Labor would lower the non-concessional contribution rate. Under current arrangements, super fund members can make non-concessional contributions of up to $100,000 a year, as long as their super balance is under $1.6 million.
Non-concessional contributions typically come from the proceeds of selling an investment, receiving an inheritance or a redundancy payment.
People under age 65 can use the “bring forward” rule and make a non-concessional contribution of $300,000 that covers the following three years. If the account balance is getting close to $1.6 million (above $1.4 million), the amount that can be brought forward is reduced.
Under Labor’s policy, the non-concessional contribution cap would fall to $75,000.
The bring forward rule would change to a one-off contribution of $225,000 for an individual or up to $450,000 for a couple.
Labor has no plans to change to concessional contributions rules, which allow for a maximum concessional contribution of $25,000 a year.
Fund members who make personal contributions, such as contractors putting money in their super accounts themselves or employees who want to top up their super above the 9.5 per cent super guarantee, can claim a tax deduction on those contribution amounts.
Labor has indicated that it might restrict access to this deduction but it has not provided details.
Another arrangement that would change under a Labor government is catch-up provisions for concessional contributions. Under the current arrangement, fund members can carry forward contribution shortfalls for up to five years (the shortfall is the difference between concessional contributions made to a super account and the $25,000 cap).
To be able to use the catch-up arrangements, the super balance must be less than $500,000. Labor has said it would abolish catch-up contributions.
Labor Government would phase out the $450 minimum monthly income threshold for eligibility for the superannuation guarantee.
Labor would start to phase out the threshold from 1 July 2020, with the threshold reduced to zero from 1 July 2024. About 60,000 people would become eligible for super guarantee payments in 2020/21 as a result of the policy, rising to 400,000 in 2024/25.
This move is in recognition of the fact that the income eligibility threshold disadvantages people who work part-time, casual and in a number of low paid jobs – particularly women.
Labor plans to lower the high-income contribution threshold from $250,000 to $200,000. Under current arrangements, the standard rate of contribution tax is 15 per cent. High-income earners pay an additional 15 per cent on concessional contributions above the threshold.
Trusts. Labor has a significant change planned. Under current arrangements discretionary trust income can be distributed on an entirely discretionary basis to beneficiaries who may be on different personal income tax rates.
Labor is proposing that a minimum 30 per cent tax rate be applied to discretionary trusts income distributions to anyone over the age of 18. Bill Shorten announced this policy in 2017 and it has not changed.
This policy only applies to discretionary trusts. A discretionary trust is so called because the trustee has the power to choose the amount of money that is paid to each beneficiary out of trust income. A beneficiary on a low or no income, such as a business owner’s spouse, will pay less tax on distributions than a high-income earner.
Non-discretionary trusts, such as deceased estates, special disability trusts and fixed trusts would not be affected. Nor would the policy be applied to farm trusts or charitable trusts.
Labor is not opposed to the use of trusts, which it acknowledges can be used legitimately for purposes such as asset protection, estate planning and business succession.
However, it says the tax advantages are exploited by wealthy individuals to minimise tax obligations. It is proposing to apply its policy from 1 July this year.
Personal income tax. Labor leader Bill Shorten said in his Budget-in-Reply speech that Labor would not support the changes to personal income tax rates that the Government has proposed to take effect in 2024/25.
These changes would reduce the number of marginal tax rates to three: 19 per cent for income between $18,200 and $45,000; 30 per cent for income between $45,000 and $200,000; and 45 per cent for incomes over $200,000.
Labor does support the Low and Middle Income Tax Offset (LMITO) proposed in the Budget, which is planned to go ahead on July 1.
Offsets available under LMITO depend on the amount of taxable income, up to a maximum of $1080 where taxable income is between $48,000 and $90,000.
However, Labor says it will increase the offset for people with taxable income below $48,000.
Labor does not oppose the changes to personal income tax rate thresholds that take effect this year. For income earned in the year to 30 June 2018, the 32.5 per cent rate applied to taxable income between $37,001 and $87,000, and the 37 per cent rate applied to income between $87,001 and $180,000.
For income earned in the year to 30 June 2019, the 32.5 per cent rate applies to income between $37,001 and $90,000, and the 37 per cent rate applies to income between $90,001 and $180,000.
Tax breaks. Labor says negative gearing benefits will be retained for newly built investment properties but not for the purchase of established housing. All negatively geared investment properties purchased prior to 1 January next year will be fully grandfathered.
Labor plans to cut the capital gains tax discount from 50 per cent to 25 per cent, with effect from 1 January next year. Grandfathering arrangements will apply to the CGT changes.
Labor plans to abolish refunds for excess franking credits. The policy includes a ‘pensioner guarantee’, which means that self-managed super funds with at least one pensioner or allowance recipient before 28 March 2018 will be exempt from the changes.