For Australian investors, the Federal election was a great result. For at least the last 2 years, the Australian Labor party was expected to win and win big! The Coalition’s win, even quoted by the Prime Minister himself Scott Morrison, was seen as a ‘Miracle’.
However, when looking into this with more detail, why was this a great result for Australian investors? Basically it means the retention of the status quo.
Below we have outlined a brief comparison of the Labor and Coalition policies as they relate to our clients and Australian investors collectively.
1. Franking credit changes
Current and retained law – The Coalition had announced no changes to franking credits. Those on 0% tax rates will continue to be eligible for cash refunds for any imputation (franking) credits.
Labor policy – Labor had pledged to ban the cash refund of franking credits available for Australian investors who are on a 0% marginal tax rate. These changes were set to affect many self-funded retirees who utilized Australian shares as their main investments within their SMSF.
Intrinsic insights…
These changes would have had a detrimental impact on all Self-funded Retirees who owned or controlled a Self-Managed Super Fund. Retirees would have lost part of their income via access to cash refunds of franking tax credits (while in a 0% tax bracket).
2. Capital Gains Tax Discount
Current and retained law – Currently, a discount of 50% applies to any capital gains made on CGT assets held by an individual for at least 12 months. Additionally, a 1/3rd discount applies to capital gains made on CGT assets held by a super fund for at least 12 months.
Labor policy – Labor proposed policy that would have reduced the CGT discount from 50% down to 25% for any assets acquired from 1 Jan 2020. The 1/3rd super discount would remain the same.
Intrinsic insights…
This change would have been a negative outcome for any long-term investor in Australia.
3. Negative Gearing
Current and retained law – The coalition has not announced any changes to negative gearing in its current form. Individuals will still be able to purchase an investment property of any age and access negative gearing provisions relating to tax.
Labor policy – Labor had planned to limit negative gearing provisions to only apply to new housing purchased after 1 January 2020. Existing arrangements would have been grandfathered based on the existing legislation.
Intrinsic insights…
Investors can still take advantage of property investing tax laws for use against wage income. (property purchased doesn’t have to be brand new).
4. Limited Recourse Borrowing Arrangement (LRBA)
Current and retained law – If the relevant rules are abided by, a SMSF is able to borrow to invest. This is commonly used to purchase an investment property within a SMSF using a mortgage.
Labor policy – Under a Labor government, you would no longer be able to implement a LRBA. All those currently in place would be grandfathered.
Intrinsic insights…
Although there are no changes to this arrangement, finding an Australian lender to this facility is becoming very difficult. Both APRA and the ATO have voiced serious concerns around LRBA’s and further policy changes around this strategy are to be expected.
5. Taxation of Discretionary Trusts (Family Trusts)
Current and retained law – The distributions from discretionary trusts are currently taxed depending on the personal tax rate of the beneficiary receiving the distribution.
Labor policy – Labor intended on levying a minimum tax rate of 30% on all discretionary trust distributions.
Intrinsic insights…
These changes would have severely reduced the effectiveness of many tax planning strategies available to one income families and Small business owners, who are looking to minimize their personal tax obligations.
6. Non-Concessional Contributions (NCC) Cap
Current and retained law – You can make after tax contributions of up to $100,000 each year (required to have a total superannuation balance of less than $1.6 million)
If you are under age 65 you can access the bring forward rule and make NCC’s of up to $300,000 over a fixed 3 year period (provided your super balance is no more than $1.4 million)
Labor policy – The NCC cap would have been reduced to $75,000 per year. Bring forward rule would be reduced to a one-off contribution of $225,000.
Intrinsic insights…
A lower Non-Concessional Contribution cap would have reduced the ability for Australian investors to build their retirement wealth through lump sum investment.
7. Concessional Contributions (NCC) Cap
Current and retained law – The current concessional contributions cap for the 2018/19 financial year is $25,000. This cap is indexed each year but will only increase in $2,500 amounts. This means that the cap will not increase in the 2019/20 year.
From 2019/20 onwards you will be able to make a catch-up concessional contribution to super to use up any amount you had left in the concessional cap from the previous year. You can carry forward your catch-up amount for a period of 5 years and claim a personal tax deduction for the catch up as long as your total super balance is below $500,000.
Labor policy – Labor did not announce any changes to the concessional cap of $25,000. Under a Labor government the catch-up contribution policy was to be abolished.
Intrinsic insights…
These changes would have affected the ability for individuals to minimize their taxes on any assessable income they receive. The proposed changes would have limited the effect of some tax minimization strategies.
In Summary
With the Coalition retaining government, it does mean stability and consistency. Australian investors should not expect any sweeping changes to occur in superannuation or investments within the next 3 years.
Intrinsic Asset Management will continue to monitor Australian regulatory changes and will keep investors informed as information comes to hand.
Intrinsic Private Wealth specialise in providing financial advice to Australian investors. With over 20 years of experience in the finance & investment industry.
General Advice Disclaimer: Information is of a general nature only and has been provided without taking account of your objectives, financial situation or needs. Because of this, you should consider whether the information is appropriate in light of your particular objectives, financial situation and needs. Intrinsic Private Wealth has financial advisers that are authorised to provide personal financial advice. Call 02 9615 4500 for more information on our available services.