David & Libby No spin on ALP’s tax plans

Make your own mind up about Labor’s proposed tax changes

IN the lead-up to an election political spin doctors go into overdrive to attack the policies of their opposition. A casualty of this process is that voters often can’t differentiate between spin and facts.

We are finding a lot of misinformation being spread about the proposed ALP tax changes for dividend imputation, capital gains tax and negative gearing.

So here are the facts, without the spin, so you can work out your personal position.

DIVIDEND IMPUTATION How it works:

● Dividend imputation was introduced by then Treasurer Paul Keating in the 1980s to stop the double taxation of dividends received by shareholders.

Back then companies would earn a profit, pay their 30 per cent company tax, then pay a dividend to shareholders from these after-tax profits, which would then be taxed a second time at the shareholders’ marginal rate.

Dividend imputation attaches a tax credit to dividends. If a company pays a 30 per cent tax on its profits, its dividends carry a 30 per cent tax credit.

For a taxpayer on a 45 per cent tax bracket, the dividends would be taxed at 15 per cent. They become tax-free for shareholders on a 30 per cent marginal rate, and for those on a lower tax bracket the excess franking credits could be used to offset other taxable income.

In 2000, the Howard/ Costello government changed the rules so that if the franking credits more than offset an investor’s entire tax bill, they’d receive a cash refund on any excess franking credits.

For example, if a company paid a $100 fully franked dividend to an investor who paid no tax, that investor would receive the $100 cash dividend plus an extra $30 cash refund from the government for the franking credit that wasn’t used. ● When the Howard government first changed the rules, the cash refund total was estimated at about $400 million a year. This has now risen to $5 billion a year as investors worked out how to benefit from the change. ● To take dividend imputation back to the original rules of simply stopping double taxation of dividends. No cash refunds. If you pay no tax then you don’t need a franking credit because you’re not being double taxed. Pensioners and part-pensioners would be exempt and still receive cash refunds. ● Self-funded retirees who structured their investment portfolios so they pay no tax, plus super funds in the pension phase that also pay no tax will be affected most.

A large number of selfmanaged super funds use excess franking credits to claim cash refunds.

While the proposed changes bring the rules back to what they were intended for, many investors and super funds have become dependent on the refunds and are fighting to maintain them. High-yielding fully franked stocks will still be

The cost: Proposed ALP changes: Impact:

attractive but won’t be supercharged by potential cash refunds.

NEGATIVE GEARING How it works:

● Investing in direct property needs a hefty deposit, transaction costs are high and it can take a while to sell and get your money out.

We need a large pool of investment properties to provide rental stock for those who can’t, or don’t want to, own a home.

Negative gearing was introduced to assist investors to get over those early financial hurdles on their way to earning a positive return. It is where you

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borrow money to invest and the income, such as rent received, is less than the expenses such as loan interest and other costs.

Essentially this means you are making a cash loss, which can be claimed against other taxable income to lower your overall tax rate and payments.

There has been a trend of investors on high marginal tax rates constantly refinancing their investment properties to be permanently negatively geared and claim the tax concession. The property never becomes positively geared where the income is taxable. ● Negative gearing tax concessions cost $4.5 billion a year. ● All existing negatively geared investments will be quarantined and continue under the existing rules. But the ALP will limit future negative gearing to new housing only. Losses from negative gearing for other investments, like shares, will not be allowed to be claimed against salary and wage income but can

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be claimed against other positively geared assets and carried forward. ● Existing investors won’t be affected. Limiting future property negative gearing to new housing will encourage development but logically see investors reassess existing properties, which could reduce demand. Having said that, positively geared property can be a good investment.

The impact: CAPITAL GAINS TAX How it works:

● Capital gains tax is applied to the capital profit made between the buying and selling price of an asset (after costs are deducted) and is added to your income and taxed at your marginal rate.

However, if you’ve held the asset for longer than a year just half the capital gain is added to your taxable income – a 50 per cent discount. The logic of this discount was to offset some of the risk associated with investing in assets as against safer interest-based investments like term deposits and savings accounts. ● The total cost of capital gains tax concessions is $8.6 billion a year. ● All existing investments will continue under existing CGT rules. All new investments will be subject to a 25 per cent discount, rather than the existing 50 per cent. New investments by superannuation funds and small businesses will be exempt from the changes and qualify for the current 50 per cent discount. ● The tax advantage of capital gains on new investments by individual investors will be lower.

The cost: Proposed changes: The impact: