Proposed ALP Changes to Neg Gearing

The ALP have indicated the if elected they propose to (from a future date to be advised) reduce the 50% CGT discount to 25%.

This policy contains a real nasty hidden tax grab and I think its going to impact more than many think.

Firstly any proposed change to the discount would have a specific date of impact and the ALP have said - A future date. So it wont be backdated. Seems fair. Hmmmmm...Maybe not.

Those who will not be affected.

• Those who use the 100% or 50% main residence exemption/s
• Non-residents since they get no CGT discount (and subject to proposed reforms could already be worse off)

Those who will be affected

• Everyone else including
• Anyone who later is affected by s118-192 which is the rule when a former home first produces taxable income; and
• Anyone who already has a property subject to partial loss of the CGT main residence exemption ie - The home has EVER been used to produce income OR where the home is a place of business whether ownership costs have ever been claimed.

Whats the nasty tax grab ??
There will be two. And the very issue that current values are off their highs for most regions in Australia exposes taxpayers to a higher CGT cost in the future if they cant use the 100% exemption. And it grows over time. Let me explain

A. s118-192 The Home that first produces income rule. This rule resets the costbase at that date to the market value of the property. Given that present values are expected to remain (or worsen) this is what may occur for heaps of properties affected by s118-192.

The taxpayers home will have a reset costbase at a lesser value that its CGT high point or even its historical cost. So the reseet costbase may be lower than actual cost !! Perhaps in some cases negative v's the historical cost of the property including all CGT acquistion costs. So taxpayers could not only face CGT on what they may argue isnt a profit at all but they could also pay more CGT based on a reduced discount.

B. The nasty hidden tax sting.
The proposed law change has been described as applying from a specific future date not yet announced. This therefore means a pro-rata calculation would be the solution. The proposed law would be very unlikely to contain an allowed method with self assessed valuations as a means to apportion any gain. Its too problematic - The easiest solution is to use time to apportion and requires few changes to tax laws eg XXXX days at a 50% CGT discount and then YYY days at a 25% discount.

However the whole of the ownership taxing period (XXXX + YYY) will not be linear. Given that property values are off their highs its even possible that a real loss has occurred in the period YYY and a gain occurred in the 50% discount period. BUT the proposed tax law will ignore that. Just like s118-192 already does.

I will use an example :

Fred owns a property (former home) that was acquired in 1/7/2013 for $400K. On 1/7/17 Fred rents the former home and at that time it was worth $750K. The proposed ALP law change occurs on 1/7/19 (Its just an example). At that time the property is worth $830K. On 1/7/20 Fred sells for $820K

How much CGT under the ALP v's the current tax law ?

The current tax law would see a CGT gain of $70K. $35k is taxed.

The proposed ALP change would see a total gain of 70K. Of this a pro-rata calculation will be required to apportion between the 50% taxed portion (2 yrs) and the 75% taxed portion (1 year)
So 2/3 x $70K is subject to a 50% discount. and 1/3rd subject to a 25% discount. $40,833 is taxed.

An increase of 16.67% However in the period of time when the reduced CGT discount applies Fred actually made a CGT loss. And lets say Fred waits a year and still sells on 1/7/21 at $820K then he pays tax on $43,750 (a 25% tax increase).

Now one of the real hidden stings is how they seem to have indexed tax rates. So time acts like inflation. However using the numbers for Fred this mean the annual inflation impact on the ever increasing taxable gain is 7.14% pa...well above inflation. And thats without a rise in property values !! Throw in a rise in property values and its even higher.

And the longer taxpayers wait out the CGT sale the longer the number of days of ownership helps delivery a higher CGT result to favour the Government.

 

Reading Noel Whittaker's most recent newsletter, he also points out that property investors will be adversely affected more so than equities investors.

Linky

Property investors must realise the entire value of the capital gain in one hit as they must sell the entire asset whereas you can sell down your share holdings over a number of years without the big hit to your taxable income.

 

I was under the impression that the 50% discount would be applicable to assets purchased before the cutoff and the 25% discount would be applicable to assets purchased after the cutoff (not that the discounts would be applied in a mixed format as suggested in the OP).

Positive plan to help housing affordability

 

I was also under the impression this was going to be grandfathered.

Was I wrong?

 

There are CGT rules that bypass that view. Remains to be seen.

eg New interests, changed interests, s118-192 maybe....Many commentators have sceptical concern that it wont be as simple as suggested. We need to hope it may be as simple as proposed.

 

Not if politicians have anything to do with it.

 

and tax agent services fees capped at a $3k deduction.

 

I was going to click like and felt a dislike button more relevant.

IMO its stupid. Tax Agent and advice fees re tax from lawyers can be required for genuine disputes with the ATO or to address a uncertain position (and even be required by law for companies !!) and such a proposal seems a unfair burden on a taxpayer. I get they want to limit taxpayers paying fees to avoid tax through schemes. Why not just ban any fees (direct or indirect) that relate to advice services intended to produce a tax benefit?

Affects SMSFs too. But then ALP think they are the playthings of the uberwealthy.
Labor’s $3k tax affairs cap tipped to hit SMSF trustees

The proposed small business carve out will have limited benefit
90k taxpayers tipped to be worse off in ‘outrageous’ $3k tax advice cap

 

They would be digging themselves a huge hole if they back pedaled on public commentary that was this specific about grandfathering existing arrangements (they will get enough as it is from those buying after the cutoff and only getting the 25% discount).

Not only does the 2016 policy I linked indicate grandfathering, but Chris Bowen has said the same last year on his website:

Chris Bowen MP > LIBERAL LOOPHOLES FOR THE LOADED

 

They grandfather it. Then before the law is passed they have a budget and announce an enhanced policy that is easier to understand and to resolve the national debt burden left by the coalition by making the tax apply from its introduction so all existing assets are apportioned to the two discount periods. Of course blame the wealthy for that over generous CGT concession supported by data and stats (its on the ALP website already). And offset the CGT change with an about face on franking credits refunds perhaps only for older retirees.

If the anti- coalition swing happens they will have the votes. Stalin never had it as good.

 

Inclined to in this case when they have provided a detail on it's implementation. What reason would you have for thinking they would follow the route of staggering the discount based on the suggestion in the OP?

 

The proposed way of calculation the discounts is disappointing. It would be more reasonable to require owners to get an independent valuation (ie the gov sets a 3mth period to get one done) and 50% discount is applied to up to that value and then any gains after are at 25%.

Do you think any future government would overturn this if labour successfully implements it?

 

I think they would overturn it. Why? Because most politicians and senators from all the different parties already have IPs

 

Governments tend not to reinstate concessions after they are removed. The ministers and departments all budget to spend the projected revenue and hey its easy to blame the now opposition for the budget mess they left. No better example of this than endless "reforms" to super.

Keatings neg gearing backflip is a rare example of saving his own neck from certain election defeat when that unpopular change occurred. The growth in investors since then means that at the next election this issue is a very unpopular choice for investors but a popular choice for non-property owners.

 

Here we go god help the aspirational:

Labor's Bill Shorten ramps up class warfare with attacks on BHP, business

 

Speaking about the policy more broadly, the proposed 25% discount rate really is a terrible idea. Further curtailing negative gearing (what's left of it) is one thing, but at least it arguably funnels investment into economically productive behaviour (building houses).

Effectively eliminating the capital gains discount as proposed is a straight out investment killer though. Due to long timeframes often involved, inflation already eats up much of capital gains, and add to that the gains often realised in one income year, the outcome will be capital gains being taxed higher than normal income in some cases. For example, an asset held for 10 years needs to increase 28% in nominal value just to keep up with inflation of 2.5% p.a. Let's say your $100K asset actually increases in value average 5% p.a. upon selling it after 10 years, which is a $63K nominal increase, but adjusted for 2.5% p.a. inflation, your real gain is just $35K. On the current 50% CGT discount you are taxed on $31.5K, whereas on the Labor 25% discount method you are taxed on $47K, despite only having made a real capital gain of $35K. This only gets worse the longer you hold the asset.

Australia's capital gains tax rate will be one of the highest in the developed world (second highest I think?). It's a monumental tax policy shift, much more significant than the negative gearing changes and yet not much of an economic case had been made for it and nobody seems to be talking about it much.

Personally I think that if this 25% CGT discount policy must be introduced, perhaps the indexation method should be reintroduced as an option, to at least make it equitable for long term investors.

 

Trusts being used to avoid paying billions in tax, report warns ATO

Just gets better each day for Bill on the Bus..Mr...30%..

 

Some logic in what you say, but then to be consistent savings interest up to the rate of inflation should be tax free.