HHG Legal Group Senior Associate Modiesha Stephens, part of the Business and Property team, discusses the future of negative gearing and the Capital Gains Tax discount in the lead-up to the coming Federal Election. This article is the first in a two-part series and explores what laws might be affected if the Opposition wins office.
As we approach the next Federal election, both major parties have announced tax policies that will significantly change the Australian tax landscape. Recent polls indicate that a Labor victory is almost inevitable. What tax changes should we expect if Labor emerges victorious in the upcoming election?
In Part 1 of this series we examine Labor’s proposed changes to negative gearing and capital gains tax.
One of the cornerstones of Labor’s tax policy is their commitment to scaling back negative gearing.
Negative gearing refers to a situation where an investor makes an investment (usually in property) which makes a loss in the short term (i.e. expenses associated with the investment such as interest on money borrowed to buy the property, management fees and maintenance costs etc exceed the rental income). This loss can be deducted against the investor’s other income (usually salary and wage income) to reduce the tax they would otherwise have to pay on their other income.
For example, say you earn $130,000 and you own a rental property; if your expenses for the property are $10,000 more than your rental income, you will be able to reduce your taxable income from $130,000 income to $120,000. This means you will pay $3,700 less in tax. However, bear in mind that although you pay less tax, you will still be out of pocket $6,300.
Labor plans to limit negative gearing so that it is only available for investments made on newly constructed housing (subject to some grandfathering provisions discussed below).
Under Labor’s policy, losses made on new investments in shares or established properties will not be able to be used to reduce the investor’s salary or wage income. These losses can only be used to offset later taxable income on the investment income (i.e. income or capital gains from the shares/established property). This includes allowing the losses to be carried forward to offset any final capital gain made on the investment (e.g. on the eventual sale of the shares/established property).
Importantly, Labor has confirmed that all investments (including investments in shares and established properties) made before Labor’s policy is implemented will not be affected by the restriction on negative gearing. This means that you can continue to negatively gear existing investments; it also means that you can continue to negatively gear any investments in shares and established properties acquired between now and when Labor’s policy is implemented (likely to be no earlier than July 2019).
Labor’s policy of grandfathering existing investments (i.e. ensuring that the new negative gearing rules do not apply to existing investments) is in line with Labor’s commitment to ensure that they will not implement any retrospective tax changes.
Labor also plans to halve the general capital gains tax discount from 50% to 25%.
Under current Australian law, if an investor has held an investment for longer than 12 months they are only required to pay tax on 50% of any capital gain made when they sell that investment. Under Labor’s policy this will be changed to require investors to pay tax on 75% of the capital gain.
Again, the new policy will only apply to investments made after Labor’s policy is implemented. In addition, this policy does not apply to:
- investments made by superannuation funds; or
- small business assets.
As the policy will only affect the general capital gains tax discount, other concessions which may apply to reduce the assessable capital gain (particularly the 50% discount under the small business CGT concessions) are not expected to be effected.
In Part 2 of this series we examine Labor’s proposed changes to dividend imputation.
Modiesha Stephens is a Senior Associate in the Business and Property team. She has experience in Taxation, Commercial Law and Estate Planning. Modiesha is a Chartered Tax Adviser with extensive experience in advising SME and individual clients in all areas of Federal taxation (including income tax, capital gains tax and GST), state taxation (including transfer duty, payroll tax and land tax) as well as tax controversy and litigation. Modiesha advises her clients on a full range of complex commercial and estate planning matters including: complex wills, succession planning, general commercial and trust law matters. Prior to joining HHG Legal Group, she held Associate Director and Senior Associate positions at Hewett & Lovitt and Munro Doig respectively. Modiesha is actively involved in the WA tax community, Modiesha is a member of the Tax Institute’s WA State Council, the Vice Chair of the Tax Institute’s Professional Development Committee, a member of the Women in Tax Committee and a member of the WA SME Technical Committee. Contact Modiesha at [email protected] or connect via LinkedIn.