Understand Labor’s election plans without the political spin   

Australians should make up their own minds about Labor’s tax plans for the upcoming federal election, say David and Libby Koch.

February 26, 2019 News.com.au


In the lead up to an election political spin doctors go into overdrive to attack the policies of their opposition. A casualty of this process is that voters often can’t differentiate between spin and facts.   

We are finding a lot of misinformation being spread about the proposed ALP tax changes for dividend imputation, capital gains tax and negative gearing.

So here are the facts, without the spin, so you can work out your personal position.

DIVIDEND IMPUTATION

How it works: Dividend imputation was introduced by then Treasurer Paul Keating in the 1980s to stop the double taxation of dividends received by shareholders.

Back then companies would earn a profit, pay their 30 per cent company tax, then pay a dividend to shareholders from these after-tax profits which would then be taxed a second time at the shareholders’ marginal rate.

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Dividend imputation attaches a tax credit to dividends. If a company pays a 30 per cent tax on its profits, its dividends carry a 30 per cent tax credit.

For a taxpayer on a 45 per cent tax bracket, the dividends would be taxed at 15 per cent.


Self-funded retirees are unhappy, and have been venting at public meetings across Australia.Source:News Corp Australia

They become tax-free for shareholders on a 30 per cent marginal rate, and for those on a lower tax bracket the excess franking credits could be used to offset other taxable income.

In 2000, the Howard/Costello government changed the rules so that if the franking credits more than offset an investor’s entire tax bill, they’d receive a cash refund on any excess franking credits.

The cost: When the Howard government first changed the rules, the cash refund total was estimated at about $400 million a year. This has now risen to $5 billion a year as investors worked out how to benefit from the change.

Proposed ALP changes: To take dividend imputation back to the original rules of simply stopping double taxation of dividends. No cash refunds. If you pay no tax then you don’t need a franking credit because you’re not being double taxed. Pensioners and part-pensioners would be exempt and still receive cash refunds.

Impact: The biggest impact will be felt by self funded retirees who structured their investment portfolios so they pay no tax, plus super funds in the pension phase that also pay no tax.

A large number of self-managed super funds use excess franking credits to claim cash refunds.

While the proposed changes bring the rules back to what they were intended for, many investors and super funds have become dependent on the refunds and are fighting to maintain them.

High-yielding fully franked stocks will still be attractive but won’t be supercharged by potential cash refunds.

NEGATIVE GEARING

How it works: Investing in direct property has always been difficult. It needs a hefty deposit, transaction costs are high and it can take a while to sell and get your money out.

We need a large pool of investment properties to provide rental stock for those who can’t, or don’t want to, own a home.


Labor leader Bill Shorten wants to change negative gearing.

Negative gearing has helped investors to get over those early financial hurdles on their way to earning a positive return. It is where you borrow money to invest and the income, such as rent received, is less than the expenses such as loan interest and other costs.

Essentially this means you are making a cash loss, which can be claimed against other taxable income to lower your overall tax rate and payments.

Over the years there has been a trend of investors on high marginal tax rates being permanently negatively geared and claiming the tax concessions.

The cost: The total cost of negative gearing tax concessions is $4.5 billion a year

Proposed changes: All existing negatively geared investments will be quarantined and continue under the existing rules. But the ALP will limit future negative gearing to new housing only. Losses from negative gearing other investments, like shares, will not be allowed to be claimed against salary and wage income but can be claimed against other positively geared assets and carried forward.

The impact: Existing investors won’t be affected. Limiting future property negative gearing to new housing will encourage new developments but logically see investors reassess existing properties, which could reduce demand. Having said that, positively geared property can be a good investment in its own right.

CAPITAL GAINS TAX

How it works: Capital gains tax is applied to the capital profit made between the buying and selling price of an asset (after costs are deducted) and is added to your income and taxed at your marginal rate.

However, if you’ve held the asset for longer than a year just half the capital gain is added to your taxable income

For some of the 850,000 self-funded retirees affected by the Shorten/Bowen Franking Credits tax grab, they will lose 30% of their annual income.

That's equivalent to them paying a 40% GST. 

By definition, this Shorten/Bowen tax grab will hurt the lowest  income self-funded retirees the most. 


On negative Gearing: the ALP will limit future negative gearing to new housing only.

This will probably add excess stock to an already lowering housing market - further lowering house values.

Lower house values may sound fine on the face of it, but many will find themselves owing loans on houses worth less than the loan.

It will likely lead to a consumer downturn, leading to a mugging of the general economy.

Unemployment will rise - further fueling housing sell-offs which will further lower house values.

A recession will result.

Thanks Bill and Chris. 

stunspore wrote on Feb 27^th, 2019 at 5:28pm:


So it doesn't matter that they have a higher effective tax rate?

lee wrote on Feb 27^th, 2019 at 5:33pm:


I'm more of a mix of ideas.  Like how about retaining tax credits for future income offsets?  As in, i couldn't claim anything this year, i will save it for next year, such as after a capital sales.

philperth2010 wrote on Feb 27^th, 2019 at 6:02pm:


You notice it doesn't say just SMSF's?

That would mean each and every super fund that has a portion of their money in the pension phase will miss out. That means even industry funds will be hit.

philperth2010 wrote on Feb 27^th, 2019 at 6:02pm:

philperth2010 wrote on Feb 27^th, 2019 at 6:38pm:


What part of dividend imputation didn't you understand. The tax is paid for them as it is for those on the 37c or 45c in the dollar rates.

It they are earning less than 37K their marginal tax rate is effectively higher.

Dnarever wrote on Feb 27^th, 2019 at 7:19pm:


They have paid dividend imputation tax. Same as people earning more than $60,000.

Effectively a 30% tax rate.

Dnarever wrote on Feb 27^th, 2019 at 7:19pm:


That only works if the companies have unfranked dividends to distribute.

If the company is solely Australian based there will be no unfranked dividends as the company has paid tax on the profits.