We analyse the likely financial planning impacts of the Federal Government’s 2019 Budget announcements, as well as Labor’s Budget Reply and some other previously announced Labor policies.
The government delivered its Federal Budget on 2 April 2019. However this year the status of the Budget is quite different to normal. There is a federal election due before any of the Budget announcements will have a chance to be implemented. It is quite possible the election will result in a change of government. In that case it is likely the Budget that actually gets implemented will be based on the policies of the Labor Party.
In this article we will therefore focus not just on the government’s Budget announcements, but also the Labor Party’s “Budget Reply” and other recent policy announcements from Labor likely to impact personal financial planning.
A key element of both the government and Labor’s announcements was a reduction in personal income tax. Both have proposed tax cuts to be implemented over a multi year period via a combination of short term offsets and longer term adjustments to marginal rates. The main difference between the two proposals is that Labor plans to provide more generous cuts to low income earners in the short term, and scale back some of the longer term cuts the government is proposing for higher income earners.
Labor has also previously announced a range of other tax policies which are more specifically targeted at investors.
They are planning to remove negative gearing for assets acquired after 1 Jan 2020. Investors will still be able to deduct investment related costs against investment income as happens now. This includes interest on loans. However investment costs that exceed investment income will no longer be deductible against salary income. Those investment income losses will need to be carried forward and deducted against future net investment income or capital gains. Assets acquired prior to 1 Jan 2020 will continue to be treated under the current rules, where net investment income losses can be deducted from salary income in the same year. One proposed exemption from this change is newly built property, which will continue to be treated under current rules even if acquired after 1 Jan 2020.
Labor is also planning to increase capital gains tax, by making tax payable on 75% of capital gains rather than the current 50%, for assets held longer than 12 months. This would only apply for assets acquired after 1 Jan 2020.
Labor has said they will end the practice of refunding excess franking credits to investors and super funds, whose other taxable income is insufficient to fully utilise the franking credit offsets. Charities and Centrelink recipients would be exempt. This proposal has generated a lot of controversy as it would heavily impact a lot of self funded retirees who don’t pay any tax, and have chosen to concentrate their investments in fully franked dividend paying shares.
In relation to family trusts, Labor has said they will tax distributions at 30%, if the beneficiary’s marginal tax rate from non trust income is lower than 30%.
Superannuation was largely untouched in the government’s Budget. The only real change of note was a relaxation of contribution rules to push some of the current age restrictions back to age 67 rather than age 65.
Labor’s Budget Reply also had little to say on superannuation, however previously announced superannuation policies include:
- Reducing the non concessional contribution limit from $100K to $75K pa
- Removing the ability for PAYG salary earners to make tax deductible super contributions up to their concessional contribution cap
- Abolishing the carry forward of unused concessional contribution cap amounts
- Widening the scope of the higher income superannuation contribution tax surcharge to include people earning more than $200K pa (rather than the current $250K pa)
- Banning new SMSF borrowing to purchase residential property
Implementation of most things discussed in this article will require the party proposing them to win the election, then that party staying consistent to their pre election announcements, and then having the ability to get them passed by a (potentially hostile) Senate. So nothing is certain!
With so many possible outcomes, we are not advocating any specific actions at this stage. But we do encourage clients to stay alert to short term political and legislative changes that may warrant quick adjustments to their financial plans.
Please note this article is not intended to be an endorsement or critique of either side of politics, and it only covers that small proportion of policies and announcements of greatest relevance to personal financial planning. We also leave it to others to analyse the potential wider ramifications of these measures for issues such as social equity, personal incentive, and overall government finances.