Potential Tax Changes and the Impact on Your Investment

We often advise our clients to never allow tax outcomes to dictate investment decisions. Of course, tax can impact the yield and capital return, so it should always be a consideration in making your final investment decision. Bearing that in mind, it should not be lost on investors when making decisions over the next 18 months the story that the federal political polls are telling us.

Leader of the opposition Bill Shorten has recently described the tax system as a ‘two-class tax system’ and with that has flagged the potential changes his government will table should they be elected to the next parliament.

Generally speaking, investment decisions should be made based on current law and not forecast potential changes to the law, however we thought it might be useful to be aware of what those flagged potential changes may look like from an investors perspective:

  • Currently investors get a 50% discount on any Capital Gains where the asset has been held for at least 12 months. The current opposition is proposing to halve the Capital Gains Tax Discount from 50% to 25%.
  • Currently investors of real estate assets get the benefit of negative gearing (where the total expenses of the asset exceed the total income of the property and the net deficit can be used to offset other taxed income), regardless of the type of property or number of properties owned. Labor is proposing negative gearing be restricted to new properties only.
  • Currently if you invest (or even run a business) through a Discretionary (Family) Trust you can distribute up to $18,200 of income tax free to an adult beneficiary who doesn’t earn any other income (an example of this might be a child in university over 18 years of age). It has been proposed that a flat 30% tax rate should apply to all adult beneficiaries of Discretionary Trusts.
  • The current top marginal tax rate sits at 47% (including the Medicare Levy) which will increase to 47.5% in a couple of years. Labor has proposed to increase this to 49.5%.
  • Currently there is no limit on the amount you can claim as a deduction for managing your tax affairs (your accounting costs). This may be restricted to $3,000.
  • Self-Managed Superannuation Funds currently have the capacity to borrow funds to invest (via a limited recourse arrangement). Labor has signalled their intention to remove this ability for SMSF’s.

Each of the above proposed changes could significantly impact your current circumstances or your circumstances at the time the changes would be implemented. We would stress however, not only are the changes only proposed at this time but there’s a few more hurdles to get there – we would not only need a change of government but the changes would also need to pass the senate and we’ve seen time and time again tax policy announced at budget time never get passed.

If you would like to discuss these proposed changes in more detail and discuss their potential impact to your specific circumstances then we would encourage you to contact us.

This article is general in nature and should not be relied upon in making an investment decision. We strongly recommend you seek financial advice prior to making any investment decisions.

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