Labor’s Proposal

Negative Gearing

Labor will limit negative gearing to new housing from a yet-to-be-determined date after the next election. All investments made before this date will not be affected by this change and will be fully grandfathered.

That means – buying new houses you get an income deduction on net losses – buying existing homes you don’t.

If the total of the interest and deductions related to investments exceed the investment income, the excess will not be able to be used for offset against other non-investment income. This excess will need to be carried forward for offset against future investment income or capital gains. Importantly, you will not have to look at each individual investment, or at any particular asset class – that would have been a very onerous and cumbersome exercise (Tax Institute senior tax counsel, Professor Robert Deutsch).

From a yet-to-be-determined date after the next election losses from new investments in shares and existing properties can still be used to offset investment income tax liabilities. These losses can also continue to be carried forward to offset the final capital gain on the investment.

It looks like new investments in share investments are safe, including any houses currently owned.

Capital Gains Tax

Labor will halve the capital gains discount for all assets purchased after a yet-to-be-determined date after the next election. This will reduce the capital gains tax discount for assets that are held longer than 12 months from the current 50 per cent to 25 per cent.

All investments made before this date will not be affected by this change and will be fully grandfathered.

This policy change will also not affect investments made by superannuation funds. The CGT discount will not change for small business assets. This will ensure that no small businesses are worse off under these changes.

Since superannuation assets are broadly spread amongst the population, Labor has carved out the Superannuation sector from the CGT proposal.

Imputation Credits

Imputation credits for individuals and superannuation funds will no longer be a refundable tax offset, and will return to being a non-refundable tax offset consistent with the tax treatment of most other tax offsets. Cash refunds will not arise if excess imputation credits exceed tax liabilities.

For superannuation funds, that means that receiving income franked at 30% would normally result in a tax refund. For example – if the fund receives a $700 cash dividend which carries a $300 franking credit, then the fund’s income is $1,000 ($700 plus $300 credit). Your fund would be taxed at 15%, which is a $150 tax bill. But because you already have a $300 tax credit, you normally would get a $150 refund ($300 tax credit less $150 tax owing). You don’t get that anymore.

You will need to focus on reducing the proportion of your investments that invest in fully franked dividends from a maximum of 100% to, probably a maximum of 50% of your investments. This will impact all assets that pay fully franked dividends, with investors looking for returns that are unfranked.

For example, an investment may pay 5% fully franked dividend, which would normally pay a grossed-up return of 7.14%. Another investment may pay an unfranked return of 6.5%. All other things being equal (risk/return), then 6.5% return is more attractive than 5%.

The days of a self-managed superannuation fund sitting in a simple portfolio of shares paying fully franked dividends will need to be re-assessed if you are looking to maximise return