There is currently a lot of stir in the news about Liberal v Labor and how their election will affect the current tax laws. A potential change in the government may have significant effects on local businesses and the average Australian Tax Payer. So, what are these potential changes?
Capital Gains Tax (CGT) to increase
This proposed change will see the discount given on CGT decrease from 50% to 25%. How does this affect the average Australian tax payer? The proposed law may affect people who own investments such as a business, a rental property or shares. For the 75% that is not exempt to CGT, the owner will have to pay their marginal tax rate depending on their taxable income. In most circumstances, the seller would have to pay 75% of the gain at the top tax rate which is currently 47%.
To put this proposed change into perspective, think about a person earning $80,000 a year who makes a capital gain of $120,000. With the new proposed CGT laws, if they purchased the property after the new laws were implemented, they would need to pay an additional $11,700.
Tax Rate to rise to 49%
Bill Shorten has proposed that if he takes over the government, he will increase the top tax rate from 47% to 49%. The change sees a 2% increase in taxes which will only affect those earning $180,000 or more annually.
The abolition of Negative Gearing
One major reason people purchase investment properties is that negative gearing properties have major tax benefits allowing losses to be offset against their other income and effectively increase their refund. A change in this law will mean that the loss on a rental property will not be able to be claimed as a tax deduction which will increase the tax that rental property owners pay annually. Properties owned previously to effective date of the proposed change will be ‘grandfathered’ meaning the changes will not apply and they will be able to claim their losses against their taxable income as a tax deduction.
Non-concessional Superannuation (NCC) Cap changed to $75,000
Currently, people can make voluntary super contributions after tax up to an amount of $100,000 annually provided they are under 75 years of age and meet the work test. It is being proposed to drop the NCC cap down to $75,000.
Under the current system, the ‘bring forward rule’ allows people to catch up on previous years super contributions. This allows for people to make NCC’s of up to $300,000 over 3 years. Following this method, a couple could deposit $600,000 over 3 years into their super accounts. The proposed change would see a person being able to deposit $225,000 over 3 years or a couple putting $450,000 over a 3-year period.
Division 293 tax rate to rise from 15% to 30%.
Division 293 tax only applies to high income earners whose combined income and super contributions are above $250,000 a year. Shorten is proposing to change the income threshold to from $250,000 to $200,000.
Currently, high income earners are required to pay 30% tax on their concessional super contributions if their income is over $250,000. The amount of division 293 tax payable is determined from the lesser amount of their income that exceeds the threshold or their concessional super contributions. If their concessional super contributions are lesser, the person will pay 15% tax within their super fund and then an additional 15% as assessed by the ATO.
The plan to lower the threshold to $200,000 will affect income earners between $200,000 and $250,000. Depending on their circumstances, their concessional super contributions will be taxed at 30% rather than 15%.
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Please note: The above listed tax changes are proposals and are not certain to become Law.