GeersSullivan 2019 Federal Election Series Commentary – Part 1

With an election looming GeersSullivan have been carefully monitoring the announced tax policies of both parties. This month we are focusing on the already announced policies of the Labor party and in April’s edition, following the release of the budget, we will highlight what the Liberal party are offering.

While both parties will announce a variety of tax policies and changes, we believe the following will have the biggest impact on our clients:

Reduced access to franking credit refunds

Franking credits represent tax paid by a company on its profits and are passed on to shareholders when dividends are declared. The logic is that the company has already paid a certain amount of tax and you as the final recipient should only have to pay the difference between that amount and what you would pay if you earned the same profit personally. Where your tax rate is lower than the company, you have been able to receive a cash refund for the difference since 1 July 2000.

Labor will remove the right to a refund for 1 July 2019, meaning franking credits can only reduce your total tax bill to zero and not be taken as a cash refund. For individuals whose main source of income is dividends this could be a big deal depending on their income level. However, where your income is from mixed sources and includes salary and wages the impact should be minimal.

Self-Managed Superannuation Funds are expected to be more heavily affected due to their low tax rate of between 0% and 15%, especially those with a high percentage of franked income (dividends, trust distributions with franking credits).

Some exemptions to the change were also announced, most importantly that pensioners earning franked income and SMSFs with at least one pensioner member will be exempt. A pensioner has been defined as a person in receipt of a government pension or allowance, most commonly the age pension or a disability pension.

Changes to tax on investments

Labor propose an end to negative gearing of investments (think rental properties, shares and similar assets) and also a reduction to the CGT discount. These are commonly reported in the media as changes to property taxes but will actually impact all investments.

In ending negative gearing Labor propose two specific changes:

1. That losses incurred through investing, such as holding a portfolio of shares and other listed securities or operating a rental property, be quarantined and only available to offset other investment income or any capital gain eventually made on the sale of the assets
2. That existing investments will be grandfathered and exempt from the change, as will investments in new residential housing stock (the construction of a rental property)

In reducing the CGT discount Labor will:

1. Reduce the discount from 50% to 25% for assets that have been held for more than 12 months
2. Grandfather the 50% discount for all assets purchased before the start date of the policy
3. Make no changes to the superfund CGT discount which is currently 1/3^rd
4. Preserve the discount as is for small business assets

A start date for both policies is yet to be announced.

Minimum tax rate on discretionary trust distributions

Currently an adult beneficiary of a trust pays tax at their marginal rate on any distribution received. This created planning opportunities where profits could be distributed to the beneficiary with the lowest possible tax rate. Under Labor’s policy the minimum tax rate for trust distributions will be 30%. This policy will only apply to discretionary trusts (commonly family trusts) so therefore excludes unit trusts and public unit trusts (commonly managed investment products from BT, MLC and similar are public unit trusts).

A 30% tax rate is still substantially lower than the top marginal rate of 45% and therefore we expect trusts to remain popular for managing family wealth. Notably the high tax rates for income paid to minors will remain under the policy.

Faster depreciation for larger plant and equipment

Labor will introduce a 20% instant write off (known as the Australian Investment Guarantee) for plant and equipment purchased after 1 July 2021 and costing more than $20,000. Notably the policy will exclude passenger vehicles and expenditure on buildings and structure.

The 20% write off will be in addition to normal depreciation deductions.

Let’s assume Manufacturing Co purchases new machinery costing $5 million. Manufacturing Co will be able to immediately expense 20 per cent ($1 million) of its investment in the first year. The remaining 80 per cent ($4 million) is then depreciated over the effective life of the asset from the first year— which in this case is 10 per cent per year, or $400,000.

This means Manufacturing company A can write off a total of $1.4 million in the first year

No more borrowing in super funds

Labor have announced they will bring an end to limited recourse borrowing arrangements in super funds. These have been extremely popular as a way to invest in property through super. Labor’s policy appears to exclude existing arrangements so no changes will need to be made to existing investments.

Individuals

Labor have released a raft of policies effecting individuals:

• The top marginal tax rate will increase from 45% to 47% for four years. We’re currently unsure if this would be achieved through a levy like the previous Temporary Budget Repair Levy or by increasing the actual tax rate
• Deductions for managing tax affairs will be limited to $3,000 per person. This change is only applicable to tax agent fees claimed in individual tax returns, not trust, company or partnership returns
• Tax cuts proposed in 2022 and 2024 will be abandoned, existing cuts beginning in 2019 financial year will be maintained
• The non-concessional super contributions cap will be reduced from $100,000 to $75,000. No start date has been advised
• Division 293 tax (additional tax on concessional super contributions) will now apply to those earning $200,000 or more rather than $250,000. Again, no start date has been announced
• Catch-up concessional contributions for those with low super balances ($500,000 or less) will be abandoned, as will deductible personal super contributions for salary and wage earners (Labor will re-introduce the 10% rule)
• Super guarantee will begin to increase again from 9.5% to 12%. Labor have added a caveat that this will apply ‘when prudent’ to do so
• The $450 per month minimum threshold for paying super will be abolished meaning super must be paid on the first dollar of salary and wages

• Twitter
• Facebook

Should you salary sacrifice?

A salary sacrifice arrangement (also known as salary packaging) is an agreement between an employee and their employer where the employee forgoes part of their future entitlement to salary in return for their employer providing them with benefits of a similar value. Not all employers offer salary sacrifice arrangements nor are they required to by law.

The requirements for a salary sacrifice arrangement to be effective are as follows:

• the arrangement needs to be in place before you perform the work (i.e. it must be prospective)
• there needs to be an arrangement between you and your employer (either written or verbal) and
• salary that is sacrificed must be permanently forgone

There isn’t any restriction on what salary can be sacrificed.  The important thing is that they form part of your remuneration, replacing what would otherwise be paid as salary. Some of the most common types of salary sacrifice arrangements include fringe benefits, exempt benefits and super.

Fringe benefits include cars, property and expense payments.

Exempt benefits are benefits that are exempt from fringe benefits tax (FBT). Examples include software, laptops, protective clothing and tools of trade. The work-related items exemption is limited to items that are primarily for work-related use and limited to one item per FBT year for items that have substantially the same function (unless it is a replacement item).

Salary sacrificed super contributions under an effective salary sacrifice arrangement are considered to be employer contributions. These are not fringe benefits when paid for an employee to a complying super fund. However, contributions made on behalf of an associate such as your spouse will be considered a fringe benefit. The same applies to contributions made to non-complying superannuation funds.

What are the implications of salary sacrificing?

• Income tax paid is based on the reduced wage you are receiving
• Your employer may be liable to pay FBT on the non-cash benefits provided.
• Your employer may be required to report certain benefits on your payment summary.
• Salary sacrificed superannuation contributions are taxed in the superannuation fund under tax laws dealing specifically with this subject.
• Salary sacrificed super contributions are classified as employer super contributions, rather than employee contributions. This will reduce the level of superannuation to be paid by your employer when meeting their superannuation obligations

These are discussed in further detail below.

Assessable Income

You only pay income tax on your reduced salary, but you receive the reduced salary plus the benefits. As such, your income tax liability should be less than it would have been without an arrangement. You can make employee contributions out of your after-tax income. These can be towards the cost of the benefits and reduce any reportable fringe benefits amount.

Fringe Benefits Tax

If there is any FBT payable on the benefits you received, your employer is liable to pay that tax. Your salary may be reduced by the amount of FBT paid by your employer as part of your salary sacrifice agreement.

If your employer pays for an expense that you would normally get a tax deduction for, your employer will not have to pay FBT on this expense. This is known as the ‘otherwise deductible rule’.  If you salary sacrifice a deductible expense, you will not be able to claim an income tax deduction for this expense in your personal return.

Reportable Fringe Benefits

If the total taxable value of certain fringe benefits received by you in an FBT year (1 April to 31 March) exceeds $2,000, the grossed-up taxable value of those benefits will be recorded on your payment summary for the corresponding income year (1 July to 30 June). Grossing up reflects the gross salary that you would have to earn to purchase the benefit from after-tax dollars.

While this amount is shown in your tax return, it is not included in your assessable income. Instead, it is used to calculate:

1. the Medicare levy surcharge
2. deductions for personal super contributions
3. the super co-contribution
4. certain tax offsets
5. the private health insurance rebate
6. Higher Education Loan Program (HELP) repayments
7. your child support obligations
8. your entitlement to certain income-tested government benefits

Super Guarantee

As mentioned above, salary sacrifice contributions are counted as employer contributions. Your employer is only required to meet the 9.5% super guarantee so if you choose to sacrifice 5% of your salary, your employer will only be required to contribute the remaining 4.5%. As such, it is always better to have an agreement in place with your employer that clearly states that the employer will continue to pay the minimum 9.5% super guarantee amount, without including your extra contributions.

If you are interested in discussing how to establish an effective salary packaging arrangement, please contact one of the team at GeersSullivan on (08) 9316 7000.

• Twitter
• Facebook