The ALP has released it’s tax policies for the 2019 Federal election. You can see them all in detail here. At the time of writing this post the only other raft of policies we can easily reference for you are those of the Greens, which you can find here. We’re still waiting on the Liberals.
We’ve been asked to provide some commentary on what’s in store for Real Estate if the ALP win. Here’s some of our thoughts.
What Policies could impact the Real Estate Industry?
We suspect that these policies will influence the investment decisions people make around real estate versus other investment options.
- Remove the ability to get excess imputation credits (franking credits) for many.
- Remove negative gearing deductions against PAYGW income except new residential property.
- Reduce Capital Gains Tax (CGT) discount to 25%.
>>EXCESS FRANKING CREDITS
NOW When a company has paid tax, a dividend can be paid with franking credits attached. The result is that the dividend recipient gets a credit for the tax the company has already paid on that dividend.
Currently, if the franking credits are more than the overall tax payable (ie excess franking credits), you receive a cash refund of these dividends.
ALP PROPOSES from 1 July 2019 you would lose this excess; that is, you can’t get them refunded in cash, you can’t keep them for next year & individuals can’t convert them to a tax loss. They just disappear.
This scenario leads to double taxation. The company has paid tax on that dividend, and so do you.
This policy has far reaching effects, so some people may decide to change their investment profile, potentially considering real estate. However, that real estate will need to be positively geared to be of value if the aim is to try to use up franking credits.
NOW Negative gearing can apply to any type of income earning investment, including Real Estate and Shares. If the income you earn from your investment is less than all the costs associated with holding that investment, including interest on your loan to purchase that investment, then that loss is tax deductible against any other income.
ALP PROPOSES you cannot apply your loss from interest deductions against salary & wage income, but can against other income like dividends, interest, or business. The exceptions to this rule:
- New residential property
- Existing negatively geared investments you already hold
Any losses that can’t be claimed will be able to be carried forward & offset against the gain on the sale of the asset.
This policy will mostly affect individuals who are employed, own a rental property and don’t receive any other income. This also might include owners who rent part of their home, for instance, on Airbnb.
>>CAPITAL GAINS TAX (CGT)
NOW Currently the 50% CGT Discount applies to any asset (subject to CGT) that you sell after holding it for more than 12 months. For instance, if you bought an investment property five years ago for $500K, sold it for $700K, then your capital gain is $200K. The 50% CGT discount means that only 50% of the $200K (being $100K) is subject to tax.
ALP PROPOSES the discount will reduce to 25%. So, in the example above, only 25% of the $200K is tax free, and the 75% remaining (being $150K) is subject to tax.
The effect is that property investors will have a larger capital gain on which to pay tax.
This is the only change to CGT law that the ALP currently propose. So, your home (that is, your main residence) will still (generally) be exempt from CGT.
What about the other ALP tax policies for the 2019 federal election?
There are many other policies that have not been discussed here, but don’t appear to have an obvious direct effect on the Real Estate industry.
If the ALP succeed in getting their policies through then taxpayers will need to re-consider their structuring and tax planning strategies.
LIMITING THE COMPANY TAX RATE FOR SMALL BUSINESS ENTITIES TO 27.5% This tax rates makes it attractive to hold investments in a company structure. So investors who prefer to invest in shares may consider whether switching to a company structure is for them.
MINIMUM 30% TAX ON DISCRETIONARY TRUST DISTRIBUTIONS This will affect everyone whose total taxable income is under $180,000. If you earn $180K, then you pay an average tax rate of 30% already. It might be advantageous for some taxpayers who own a business or positively geared investments already to hold new negatively geared investments in a Discretionary Trust structure to make use of those losses to minimise distributions to individuals.
Will the changes get through?
It will be difficult for the ALP to change tack on these policies. They money raised through these policies is already spent in their election promises. However, this will be a changing space because there are currently many unknowns. For instance, when the changes will take effect, how any “grandfathering” provisions will work or what the final detail of the legislation will be. If the ALP are elected at the next election, they still need to get the legislation through.
© 2019 My Accountant Qld. This document has been prepared as a general informational piece about some of the potential impacts of ALP policy for the 2019 election as at 12 February 2019. This information is general in nature and we do not accept responsibility for the outcomes of decisions made by anyone relying on this information; you should seek professional advice for your own personal circumstances. My Accountant Qld is not licenced to provide financial product advice under the Corporations Act 2011. Taxation is only one of the matters that must be considered when making a decision on a financial product. You should consider taking advice from an Australian Financial Services licensee with the appropriate authorisation before making a decision on a financial product. Liability limited by a scheme approved under Professional Standards Legislation.