is the aussie dream under threat?
Will the Tax Reforms being proposed by the Shorten government threaten the financial dreams of middle class Australia, and the retirement plans of many?
The Australian dream – a comfortable life under a fertile sun-drenched landscape, raising a family in a safe and beautiful land with the potential of financial freedom and abundance. We all strive to earn our keep, become the best versions of ourselves and create thriving businesses, careers and lifestyles to experience with our loved ones.
But the question I propose is this; is the Australian dream coming under threat with the tax reforms being proposed under a Shorten Government?
Now, I know the golden rule – never talk politics and I can ensure you that is not the aim of this post. I wish to put the politics aside for a moment and simple state, openly and objectively, what the Shorten tax reforms being proposed are and how they may impact the Aussie Dream.
The polls predict that Australian’s are set to elect Bill Shorten as their 31st prime minister in a months time. The leadership seems to be an anti-business Government that will slug millions of Aussies with higher taxes. The proposed policies will hurt small business entrepreneurs, professionals, managers, savers, self funded retirees, investors and the majority of middle class Australia.
Here is a run down of the main tax slugs and how they may impact you.
FOR THOSE ASPIRING TO INVEST, ACCUMULATE WEALTH & CREATE THEIR OWN AUSSIE DREAM
The below 3 tax reforms affect any Aussies and business owners thinking of investing in the near future to achieve financial freedom, assist their children by way of investment or plan ahead for their retirement.
Tax on Capital Gains to SKYROCKET!
Australia will have one of the highest effective tax rates on capital gains in the world under Shorten’s plan to slash the discount from 50% to 25%. Under current tax rules, an investor who holds an asset (such as shares, property, land, managed funds etc) for more than 12 months pays tax on 50% of any gain. Under the Shorten plan, only 25% of the gain will be exempted.
The only good news is that the lower discount rate won’t be applied retrospectively so that investments made before the effective date of the change (“sometime after the election”) will be grandfathered. But if you’re planning on purchasing any investments on or after this date with the intention to one day cash in on a gain, a higher capital gain tax will apply!
Negative Gearing only on 'new housing'
Negative gearing will be limited to “new housing”. The commencement date will be announced after the election, with investments made before this date grandfathered.
The change will also apply to other assets including shares which are purchased with the assistance of a margin loan, or an investment in a business using borrowed monies. While interest will still be deductible, it will only be deductible to the extent that the income and the allowable deductions are fully offset – you won’t be able to claim a ‘net’ investment loss.
Although grandfathering will help existing investors, all property owners could be impacted if investors withdraw from the market and house prices fall. The Shorten government believe this will assist Australian’s in being able to enter the property market. According to a recent study conducted by SQM Research, its predicted that rents are expected to increase, as investors will require higher returns to compensate for the loss of the tax benefit. So if the goal is to assist renters to become home-owners, yet rent is expected to increase due to the loss of negative gearing, this sounds somewhat counter-intuitive.
Top tax rate rises to 49%
Back in 2014 after the horror of the Abbott/Hockey budget, a temporary “budget repair levy” of 2% was applied to those on the highest marginal tax rate of 45%. The levy expired on 30 June 2017.
Shorten proposes to re-instate the levy by making a permanent increase of 2% to the top tax rate. Under Shorten, the top tax rate will increase to an effective 49% (47% plus 2% Medicare Levy). Taxpayers earning more than $180,000 pa will be impacted.
FOR THE SUPER INVESTOR, RETIREES OR THOSE PLANNING TO RETIRE IN THE FORESEEABLE FUTURE
Retiree tax
Shorten will stop the re-funding in cash of excess franking credits. Known as the “retiree tax”, franking credits act as a tax offset and are attached to share dividends paid by companies such as Telstra, BHP and the major banks. If the tax offsets are not used, they are currently refunded in cash by the Australian Taxation Office.
The change will apply to dividends paid from 1 July 2019.
This proposal will impact thousands of self-funded retirees who are drawing a pension from their retirement funds. While the impact will vary, a typical example sees a self-funded retiree drawing a pension of $60,000 pa from their super fund being around $10,000 pa worse off.
Other low rate or 0% taxpayers, such as a non-working spouse who owns shares, will also be impacted.
In his first backdown, Shorten announced that persons in receipt of a government benefit such as the aged pension, or an SMSF where one member was on a government benefit on 26 March 2018, will be exempted from the change.
Super contributions cap slashed to $75,000
Two years ago, the cap on non-concessional contribution to super – those contributions using your own ‘after tax’ monies – was reduced from $150,000 to $100,000 pa. Now, Shorten proposes to lower this again to just $75,000 pa.
The lower cap will reduce the ability to make large one-off contributions to super which may come by the way of for selling an asset, an inheritance or a termination payment or some other form.
Currently a person under age 65 can use the ‘bring forward rule’ and make 3 years’ worth of non concessional contributions in one year – that’s $300,000 into super in one hit per person. Under the proposed reforms by Shorten, this will fall to $225,000.
Clearly, Shorten doesn’t see the super system as a place for savers or the “comfortably off” to invest their surplus funds.
Shorten has also announced that he will abolish ‘catch-up’ concessional contributions and end the deductibility of personal contributions within the concessional cap. The latter can be used by individuals whose employer doesn’t offer salary sacrifice facilities.
More to pay higher tax rate on super contributions
Currently a higher tax rate (effectively 30%) applies to concessional super contributions made by higher income earners (those earnings more than $250,000 p.a.).
Shorten proposes to lower it to $200,000, meaning that persons on incomes from $200,000 to $250,000 will have their concessional super contributions taxed at 30% (rather than 15%).
For savers and those planning to fund their own retirement (as opposed to the Government), another change that makes the super system less attractive.
We go to the polls in exactly a month. I hope the above summary of the reforms sheds some light on the antics and hysteria that impregnates the media weeks before the delivery of the votes - where our destiny, albeit for the next 4 years, is determined.
But the question I propose is this; is the Australian dream coming under threat with the tax reforms being proposed under a Shorten Government?
Now, I know the golden rule – never talk politics and I can ensure you that is not the aim of this post. I wish to put the politics aside for a moment and simple state, openly and objectively, what the Shorten tax reforms being proposed are and how they may impact the Aussie Dream.
The polls predict that Australian’s are set to elect Bill Shorten as their 31st prime minister in a months time. The leadership seems to be an anti-business Government that will slug millions of Aussies with higher taxes. The proposed policies will hurt small business entrepreneurs, professionals, managers, savers, self funded retirees, investors and the majority of middle class Australia.
Here is a run down of the main tax slugs and how they may impact you.
FOR THOSE ASPIRING TO INVEST, ACCUMULATE WEALTH & CREATE THEIR OWN AUSSIE DREAM
The below 3 tax reforms affect any Aussies and business owners thinking of investing in the near future to achieve financial freedom, assist their children by way of investment or plan ahead for their retirement.
Tax on Capital Gains to SKYROCKET!
Australia will have one of the highest effective tax rates on capital gains in the world under Shorten’s plan to slash the discount from 50% to 25%. Under current tax rules, an investor who holds an asset (such as shares, property, land, managed funds etc) for more than 12 months pays tax on 50% of any gain. Under the Shorten plan, only 25% of the gain will be exempted.
The only good news is that the lower discount rate won’t be applied retrospectively so that investments made before the effective date of the change (“sometime after the election”) will be grandfathered. But if you’re planning on purchasing any investments on or after this date with the intention to one day cash in on a gain, a higher capital gain tax will apply!
Negative Gearing only on 'new housing'
Negative gearing will be limited to “new housing”. The commencement date will be announced after the election, with investments made before this date grandfathered.
The change will also apply to other assets including shares which are purchased with the assistance of a margin loan, or an investment in a business using borrowed monies. While interest will still be deductible, it will only be deductible to the extent that the income and the allowable deductions are fully offset – you won’t be able to claim a ‘net’ investment loss.
Although grandfathering will help existing investors, all property owners could be impacted if investors withdraw from the market and house prices fall. The Shorten government believe this will assist Australian’s in being able to enter the property market. According to a recent study conducted by SQM Research, its predicted that rents are expected to increase, as investors will require higher returns to compensate for the loss of the tax benefit. So if the goal is to assist renters to become home-owners, yet rent is expected to increase due to the loss of negative gearing, this sounds somewhat counter-intuitive.
Top tax rate rises to 49%
Back in 2014 after the horror of the Abbott/Hockey budget, a temporary “budget repair levy” of 2% was applied to those on the highest marginal tax rate of 45%. The levy expired on 30 June 2017.
Shorten proposes to re-instate the levy by making a permanent increase of 2% to the top tax rate. Under Shorten, the top tax rate will increase to an effective 49% (47% plus 2% Medicare Levy). Taxpayers earning more than $180,000 pa will be impacted.
FOR THE SUPER INVESTOR, RETIREES OR THOSE PLANNING TO RETIRE IN THE FORESEEABLE FUTURE
Retiree tax
Shorten will stop the re-funding in cash of excess franking credits. Known as the “retiree tax”, franking credits act as a tax offset and are attached to share dividends paid by companies such as Telstra, BHP and the major banks. If the tax offsets are not used, they are currently refunded in cash by the Australian Taxation Office.
The change will apply to dividends paid from 1 July 2019.
This proposal will impact thousands of self-funded retirees who are drawing a pension from their retirement funds. While the impact will vary, a typical example sees a self-funded retiree drawing a pension of $60,000 pa from their super fund being around $10,000 pa worse off.
Other low rate or 0% taxpayers, such as a non-working spouse who owns shares, will also be impacted.
In his first backdown, Shorten announced that persons in receipt of a government benefit such as the aged pension, or an SMSF where one member was on a government benefit on 26 March 2018, will be exempted from the change.
Super contributions cap slashed to $75,000
Two years ago, the cap on non-concessional contribution to super – those contributions using your own ‘after tax’ monies – was reduced from $150,000 to $100,000 pa. Now, Shorten proposes to lower this again to just $75,000 pa.
The lower cap will reduce the ability to make large one-off contributions to super which may come by the way of for selling an asset, an inheritance or a termination payment or some other form.
Currently a person under age 65 can use the ‘bring forward rule’ and make 3 years’ worth of non concessional contributions in one year – that’s $300,000 into super in one hit per person. Under the proposed reforms by Shorten, this will fall to $225,000.
Clearly, Shorten doesn’t see the super system as a place for savers or the “comfortably off” to invest their surplus funds.
Shorten has also announced that he will abolish ‘catch-up’ concessional contributions and end the deductibility of personal contributions within the concessional cap. The latter can be used by individuals whose employer doesn’t offer salary sacrifice facilities.
More to pay higher tax rate on super contributions
Currently a higher tax rate (effectively 30%) applies to concessional super contributions made by higher income earners (those earnings more than $250,000 p.a.).
Shorten proposes to lower it to $200,000, meaning that persons on incomes from $200,000 to $250,000 will have their concessional super contributions taxed at 30% (rather than 15%).
For savers and those planning to fund their own retirement (as opposed to the Government), another change that makes the super system less attractive.
We go to the polls in exactly a month. I hope the above summary of the reforms sheds some light on the antics and hysteria that impregnates the media weeks before the delivery of the votes - where our destiny, albeit for the next 4 years, is determined.