How will the upcoming election affect you and your money?

How will the upcoming election affect you and your money? 1

No doubt you’re feeling confused and frustrated about the upcoming election’s impact to you and your money.

The 2019 federal election is close at hand and there is an increasing likelihood of a change in government (if the recent news polls are anything to go by). Which means, it’s even more important for you to understand the key differences in the policies of the two major political parties and how some key policies may affect you & your money.

Many of my financial advice clients have been asking me about how the proposed changes may affect them, their investments, their superannuation and tax, and although I will be discussing  what we may need to do to review their existing strategies, I’ve decided to post this article for their benefit and that of the wider community who may also be interested to know.

As a husband and father, there are many areas of government policy that concern me but this is not the time or place for a discussion on climate change, meeting target omissions, school funding, hospitals, major project announcements or any other policy (the list goes on…).

My focus here is to highlight the areas that may affect our financial future today and tomorrow.

Take a look at my top 8 policy announcements that everyone should look out for:

Note: this overview is based on policies that have been announced as at March 2019 (which have mainly come from the ALP camp).

INVESTMENTS

Negative gearing

The ALP: proposes that negative gearing (with regards to an investment property) be restricted to newly constructed dwellings.

The Coalition: No proposed changes to the current legislation.

Implications:

  1. The ALP has not proposed to apply this retrospectively, so it won’t affect any investments made prior to when or if this is legislated;
  2. You would still be able to deduct the net rental loss (or losses) from your personal income, provided the investment is a newly constructed property; and
  3. If legislated, any losses from investments (such as shares and existing property) would only be able to be offset against the tax liabilities of the actual investment income (ie. not personal income).

Franking credits

The ALP: proposes that franking credits would no longer be refundable where dividends are received (proposed to commence 30 June 2019).

The Coalition: No proposed changes to the current legislation.

Implications:

  1. Under the ALP’s proposal franking credits could still be used to offset a tax liability and to reduce tax payable;
  2. It would not affect recipients of a Centrelink pension or allowance, or members of a SMSF receiving a Centrelink pension or allowance (prior to 28 March 2018, also referred to as the ‘pensioner guarantee’);
  3. It could have an impact on individuals and SMSFs invested in Australian equities.

Consider a review after policy announcements are confirmed. For point #3 above, individuals affected would mainly be self-funded retirees and low income earners.

CGT discount

The ALP:  intends to reduce the capital gains tax (CGT) discount to 25%.

The Coalition: No proposed changes to the current legislation.

The current CGT discount is 50% (after an asset is held for 12 months by an individual or trustee).

Implications:

  1. This would significantly increase the tax payable for any assets acquired & disposed in future should this be legislated;
  2. In the case where a client has a dividend reinvestment plan (as part of a portfolio of Australian equities, for example), it may affect the CGT payable on future disposal of the asset(s);
  3. It would only apply to all future investments and not currently held investments as there is no commencement date and it is not proposed to be applied retrospectively (ie “grandfathered” provisions); and
  4. No change has been proposed to the CGT discount of 10% currently available to superannuation funds (including SMSFs);

In point #2 above, I will be looking at this more closely however if there is potential impact it would be advisable to seek advice from a registered tax agent to confirm the tax implications (but only after (or if) this has been legislated).

There are other factors to consider however overall this proposal will negatively impact future investors by reducing the CGT discount from 50% to 25%, and in conjunction with the proposed increase in personal tax rates could impact future long term projections of an investment.

SUPERANNUATION

Non-Concessional Contribution Cap (NCC)

The ALP: proposes a reduction to the non-concessional contribution (NCC) cap from $100,000 down to $75,000 pa.

The Coalition: No proposed changes to the current legislation.

Implications:

  1. The existing bring-forward rule permits an “after-tax” contribution of up to $300,000 in a single year which would be reduced to a maximum of $225,000.

A commencement date has not yet been proposed, however it may be prudent to consider maximising the contribution prior to the end of this financial year as part of a pre-retirement strategy (if this affects you).

Limited Recourse Borrowing Arrangements (LRBAs)

The ALP: proposes to ban Limited recourse borrowing arrangements (LRBAs) in a Self-Managed Super Fund.

The Coalition: No proposed changes to the current legislation.

Implications:

  1. If legislated, you will no longer be able to borrow funds to invest (in a SMSF). This will affect anyone that is considering buying an investment property or business real property in their SMSF with borrowed funds (as an LRBA would be required); and
  2. In conjunction with the proposed reduction in contribution limits and the new proposed bring-forward limitations, anyone looking to payout existing loans in their SMSF by making Non-concessional contributions might find it difficult.

If you are considering buying an investment property or business real property (for business owners) within your super; it’s important that you immediately review your current circumstances, future goals and eligibility to determine if you should consider this strategy going forward.

Superannuation Guarantee Contribution (SGC) rates

The ALP: proposes to accelerate an employer’s compulsory Super Guarantee Contribution (SGC) from the current 9.5% to 12% (commencement date yet to be proposed).

The Coalition: No intention to change from the current rate (rising from 9.5% to 10% as planned in 2022, and gradually increasing to 12% SGC by 2026).

Implications:

  1. If SGC rate increases are fast tracked, this would have an immediate impact on the cashflow of small to medium businesses, with a knock-on effect of a reduced bottom line and additional pressure to increase profits to compensate;
  2. No commencement date has been put forward by the ALP, however the additional burden on small to medium businesses will be felt, which may lead to unexpected job loss in the short term

Should the ALP take office, they would need to seriously consider “offsetting” the impact on small to medium businesses by providing an incentive elsewhere (we hope).

Taxation

Taxation of trust distributions

The ALP: proposes that trust distributions (from discretionary trusts) be taxed a minimum of 30%. A commencement date of 1 July 2019 has been proposed.

The Coalition: No intent to change the existing legislation.

Implications:

  1. If legislated, will greatly impact businesses or individuals that operate under a family trust structure (or hold beneficial interests via a family trust structure) as it removes the ability to minimise tax by income splitting;
  2. There are proposed exemptions, namely it will not impact certain types of trusts such as testamentary trusts, special disability trusts, charitable trust and farm trusts.

Where trust distributions are part of your current strategy/operating set-up, you may need to review the impact on you or your business cashflow. This will need to be in conjunction with seeking specific advice from a registered tax agent to review your existing tax strategies and structure.

Division 293 tax

The ALP: proposes to reduce the current 15% Division 293 tax threshold from $250,000 down to $200,000.

The Coalition: No intention to change the current legislation.

Implications:

  1. Concessional contributions into Superannuation will be taxed at a higher rate (30% not 15%) for those earning more than $200,000;
  2. Will impact existing salary sacrifice arrangements for those in that income bracket; and
  3. Will require an immediate review to ensure existing strategies are still relevant.

It may still be relevant to contribute towards Super as the marginal tax payable would be higher for that income bracket, with the overall benefit being an increased super balance and reduction in personal income tax.

Whether you are just starting to think about your retirement savings, running a business, juggling the family budget or making your first investment; these government policies have the potential to affect all of us. The key is to understand how it will affect you and what you can do to protect yourself; and that might mean getting help. I urge you, if any of the 8 key policy announcements above concern you, to take the steps you need to take in order to protect your money and seek financial advice.

I have a feeling there is more to play out in all of these areas as we get closer to the date of the next federal election, so let’s see what happens!

by Steve Luman AFP, TPB, ADFP

(Ps: I’d like to give credit to MLC as a source of reference for some of the above information)

Sunlife Financial Advisory is a corporate authorised representative of Myplanner Professional Services Pty Ltd AFSL 425542.
All content contained this website is of a general nature and intended solely for illustrative purposes. Such content is not to be construed as advice (neither general or personal) as we have not taken into account your personal information, financial situation, goals & objectives or personal circumstances.
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