Tax issues have featured prominently in the pre-election debate. We summarise here some of the key battlegrounds.
Personal income tax issues
- Rates and brackets. The Coalition will allow the temporary 2% Budget Repair levy (imposed on incomes over $180,000) to cease on 30 June 2017. The ALP will retain it. Both parties agree that the $80,000 income bracket should increase to $87,000.
- Negative gearing. The Coalition will maintain the status quo for income from investments in housing. From 1 July 2017, the ALP proposes negative gearing will only be available for the purchase of new housing (although existing investments at 1 July 2017 will not be affected). For existing housing acquired after 1 July 2017, losses can be carried forward, ‘to reduce any capital gain on the investment when realised.’ It is not clear whether the loss can be used sooner if the investment turns positive.
- The Coalition will maintain the status quo for income from investments in shares. Interestingly, the ALP policy also extends to, ‘losses from new investments in shares.’ Losses on geared share portfolios will be deductible from other types of investment income but if a loss still remains, it will not be deducible after 1 July 2017 (existing investments at 1 July 2017 will not be affected). Losses can be carried forward, ‘to reduce any capital gain on the investment when realised.’ It is not clear whether the loss can be used sooner if the portfolio turns positive.
- CGT discount. The Coalition will maintain the status quo. The ALP will reduce the CGT discount for individuals and trusts from 50% to 25%, but only for gains on assets purchased after 1 July 2017. The 33% CGT discount for superannuation funds will not change and the CGT discounts for the assets of small business entities will not change.
- Contributions. Both the Coalition and the ALP will increase the tax rate on contributions to 30% for individuals earning over $250,000.
- The Coalition will reduce the cap on concessional contributions to $25,000; the ALP has not formally announced a position on this proposal.
- The Coalition will reform the cap on non-concessional contributions by introducing a lifetime cap of $500,000 (with the calculation backdated to 1 July 2007). The ALP has criticised this policy as ‘retrospective.’
- Benefits. Pension benefits will remain tax-free to the member but the Coalition will limit the amount that can be applied to fund benefits to $1.6m. Amounts in excess of this will need to be removed or earnings on the excess will bear tax in the fund at 15%. The ALP will allow member pension benefits to be tax-free up to $75,000 a year per individual. Earnings above the $75,000 threshold will attract tax at 15% although it is not clear whether this will be collected from the fund or the member.
- The Coalition proposed a number of more specific changes in the 2016-17 Budget. The ALP’s response is not yet known although press reports indicate that the ALP costings assume these measures will proceed.
- Rates. The Coalition has announced a gradual reduction in the corporate tax rate to 25% (reached in 2025-26) beginning with a reduction to 27.5% in 2016-17 for companies with a turnover under $10m. The ALP has said it supports the reduction in the corporate rate to 27.5% but only for companies with turnover under $2m.
- Tax Avoidance Taskforce. One of the largest measures in the 2016-17 Budget was the Coalition proposal to create a Tax Avoidance Taskforce within the ATO. The ALP has publicly supported this announcement.
- Hybrid instruments and entities. Both the Coalition and the ALP have said they will implement the OECD recommendations on controlling hybrid mismatches for cross-border instruments and entities.
- Financing. The ALP has said it will limit the amount of interest that can be deducted in Australia by reference to the external debt ratio of the worldwide group (the ‘worldwide gearing ratio’).
- Diverted profits tax. The Coalition announced a UK-style ‘Diverted Profits Tax’ levied at 40% to start on 1 July 2017.