/How the federal election will change the taxes you pay

How the federal election will change the taxes you pay

Posted

May 13, 2019 12:19:21

How much tax you pay could change depending on who wins this year’s election.

The major parties are locked in political brawls over franking credits, negative gearing and tax cuts.

I keep hearing about a ‘retiree tax’. What is it?

Labor wants to end a policy that sees more than $5 billion a year in cash refunds paid to shareholders who do not pay any tax.

The Government hates the plan.

What? How do I get free cash?

Well, it isn’t entirely free.

When a company pays a dividend to shareholders, it has probably already paid company tax.

To avoid the company’s profit being taxed again, these shareholders get credits equivalent to the company tax paid.

Shareholders can then cash in these so-called franking credits at tax time to reduce their own tax bill.

But if their tax bill comes to zero — and the shareholder has leftover franking credits — since 2001 the tax office has given them a cash refund.

The effect of this is that the company profits they are getting are not taxed at all.

OK, so this is hitting lots of retirees. Why is that?

Nearly half of those affected would be retirees (but mostly not those getting a pension — they’ve been shielded from the change).

When it comes to superannuation, a retiree can have $1.6 million worth of investments in the kitty where earnings (for this example, dividends from shares) are not taxed.

Many of the retirees angry about the plan manage their own super and have been receiving these cash refunds. (Not everyone is mad about it, though.)

Half of all refunds go to the richest 10 per cent of these self-managed super funds, which have at least $2.4 million in assets.

I’m a property investor do I have anything to worry about?

First question: Is your property negatively geared?

Negative gearing:

  • Salary from wages: $100,000
  • Investment property loss: $10,000
  • Taxable income: $90,000

If expenses (like interest payments and maintenance costs) are not covered by the rent collected, you can deduct this loss from other income — say, your wages as an employee. This is what’s known as negative gearing.

If elected, Labor would restrict negative gearing to new properties.

It would also increase taxes on any profit from the sale of an investment property (known as capital gains tax).

Only half the profit is taxed currently, but that would rise to 75 per cent of the profit.

Capital gains taxation:

  • Purchase price: $10 million
  • Sale price: $20 million
  • Profit: $10 million
  • Amount subject to tax under Coalition: $5 million
  • Amount subject to tax under Labor: $7.5 million

Investments made before January 1 next year will not be affected.

Again, the Coalition would leave things as they are.

Labor’s policies would add about $3 billion to the budget over four years.

The Grattan Institute, which supports a shakeup, says much of the benefit currently goes to top income earners.

What’s the impact likely to be?

Labor announced the policy before the last election when property prices were still climbing.

While prices have since peaked and are now dropping, the median capital city price is still higher than in July 2016.

The federal Treasury said the change could place “some downward pressure” on home values, particularly if coinciding with a downturn.

But the Commonwealth’s top bean counters have repeatedly downplayed the likely impact on home values.

Labor says the policy will help put first-home buyers and investors on an equal playing field.

I don’t have any investments — I’m just a regular taxpayer. Anything for me right now?

The Coalition wants to slash personal income tax by about $300 billion over a decade.

Let’s put that in some perspective: if every worker was getting the same tax cut (spoiler alert: they’re not), that would be about $25,000 each.

But the ALP only likes the first bit of the plan — cash back for millions of Australians.

Whichever party wins, people earning between about $50,000 and $90,000 will get a tax refund of up to $1,080 a year (check our table below to see how much you’ll get).

Labor says it would do this forever, while the Coalition would trim the payments after four years (remember, though, it is promising other stuff).

What’s the income tax plan beyond that?

This is the most expensive chunk of the Coalition’s $300 billion plan. And it’s where the Liberal-Labor kumbaya unity ticket gets torn apart.

Some of these tax cuts have already passed Parliament, but below is the full shebang. There are a few numbers ahead. Strap in.

In 2022-23 (four financial years away): 

  • The 19 per cent tax rate would apply to people earning up to $45,000 (currently it’s $37,000)
  • The 32.5 per cent bracket would be extended from $90,000 to $120,000

In 2024-25 (six financial years into the future):

  • Everyone earning between $45,000 and $200,000 would pay the same marginal rate of tax — 30 per cent — meaning the high-income earner would pay heaps more in dollar terms

What’s the impact of all this? According to the Grattan Institute, “high-income earners would benefit the most”.

The independent think-tank said the top 20 per cent would still pay most income tax (65 per cent) but the overall share they pay would fall slightly (down from 68 per cent).

Impact of the immediate tax-cut plans (including a couple of things we didn’t mention):

Taxable income Liberal plan phase 1 Labor plan
$25,000 $255 $350
$30,000 $255 $350
$35,000 $255 $350
$40,000 $480 $549
$45,000 $855 $881
$48,000 $1,080 $1,080
$80,000 $1.080 $1,080
$100,000 $915 $915
$120,000 $315 $315
$140,000 $135 $135
$160,000 $135 $135
$180,000 $135 $135
$200,000 $135 -$265

Want to know more? Here’s what else we know:

Topics:

government-and-politics,

housing-industry,

tax,

federal-elections,

australia