How will Labor’s proposed changes impact you?

by Cardena

Capital gains tax, changes to trusts

28 February 2019

Australia’s superannuation nest egg is estimated at more than $2.7 trillion and is attracting attention all over the world but not all of it is positive. Domestically, both sides of politics have altered superannuation and investment rules in the name of fairness but in the process changed the landscape for investors, forcing them to reconsider their choices. Never has there been a more important time to seek financial advice and be confident in your investments to sustain your financial future.

Last year the Labor party signaled that they will reform a number of measures should they win the next general election expected in May.

Assuming they win, they still need to get any new legislation through both houses of parliament. With a likely fractured senate they may have to offer concessions to gain approval.

While the change to franking credits is grabbing much of the attention, we’ll cover this in Part 2 of Labor’s proposed changes next week.

Capital gains tax
Currently, investors that hold an asset for at least a year, receive a 50% capital gains tax discount on any profit they receive.

For example, assume Jack bought an investment property in Bronte five years ago for $2 million and sold it for $3 million this year. The $1 million profit is not taxed at Jack’s marginal tax rate, under current rules he receives a 50% discount and so pays tax on $500,000.

Under the new proposal, the capital gains tax discount is reduced from 50% to 25%. Jack would then pay tax on $750,000.

The date of any changes has yet-to-be-determined but Labor has stated it “must be done without negative retrospective impacts on existing investments”.

Cardena Director, Iain Reid commented “If you are considering taking advantage of lower property prices or investing in other assets, it is worthwhile considering timing of possible changes to capital gains tax, although there will be many other factors to consider before making an investment”

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The Current Issues with Trusts and the Tax System report by RMIT University, commissioned by the ATO found that income from trusts topped $340 billion in 2013-14. By 2016, Australia had nearly 850,000 trusts with assets worth over $3 trillion. The experts predict there could be over a million trusts by 2022.

While there is a wide variety of trusts, the report found 73% were discretionary trusts used for trading or investment. That is in contrast to other countries where they are mostly used for the administration of wills and deceased estates, donations to charities and to provide income for people unable to manage their own affairs.

Last year, Federal opposition leader, Bill Shorten announced proposed changes for discretionary trusts if Labor wins government.

In the Labor paper “A Fairer Tax System - Discretionary Trusts Reform”
the stated aim of the proposal is to reduce income splitting between family members who pay reduced or no tax.

The proposal suggests a minimum 30% tax on trust distributions to beneficiaries aged over 18 and would apply from 1 July 2019.

Most other trusts such as testamentary, charitable and farm trusts will be excluded.

The ALP proposal is not to tax the trust - the income tax liability falls upon the individual beneficiaries of the trust in the form of supplementary personal income tax.

At present a trustee must lodge a tax return each year reporting the net income or loss: trusts are treated as "pass through vehicles" for tax purposes, so tax only applies when the income is in the hands of beneficiaries.

Please call the office on (02) 8016 3200 if you have any particular concerns that have not yet been discussed with your adviser.