While the rest of the country is getting exercised about other things, I thought it timely to return to a topic that had legs in 2019 when Labor lost an election it was, apparently, going to win by a mile. Talk of another election has been hosed down by the prime minister, but it won’t be too long before these issues will again start to enter the public sphere.
Sometime in the early part of this year, Labor publicly announced that it would drop the policy whereby a tax credit would not be paid to retired shareholders on account of tax paid by companies. This sounds pretty arcane and marginal but if you’re living on uncertain income from investments – as retirees all are – then it sort of becomes a big deal.
Franking credits are tax refunds available for retired shareholders. Because companies pay income tax, the government decides that shareholders do not have to pay tax on dividends paid to them as a result of owning shares. Under the existing system, even if you pay no income tax, you still receive a payment from the government equal to the income tax paid by the company relative to that part of its equity that you hold.
Labor had wanted to abolish this benefit but, as far as I know, their punitive negative gearing policy is still on the books. This is where expenses incurred due to ownership of an investment property – such as council rates and the interest owing on your mortgage (if you don’t own the property outright) – are deducted from the assessable total income you present to the Australian Tax Office when you lodge your annual tax return.
The capital gains tax rebate was also targeted by Labor. This relates to tax that has to be paid on part of the difference between what your investment property cost and what it realised upon sale – called the “capital gain” – but only on the first 50 percent of it. Labor had wanted to reduce that to the first 25 percent with the exception of properties that had been bought before the new law would be passed (this is called “grandfathering”). Another exception would have been newly-built properties, which would have still attracted the full, 50-percent tax concession.
Labor had also wanted to reduce the amount of benefit that could be realised through the use of family trusts, which many retirees use to organise their money. On 21 January 2019 the website Accountants Daily, which is operated by Momentum Media, published a story about the Labor policy. It included this:
About two years ago, opposition leader Bill Shorten announced that Labor would reform the taxation of discretionary trusts to prevent income from being allocated to household members in lower tax brackets.
As part of its reforms, Mr Shorten outlined that Labor would introduce a minimum 30 per cent tax rate for discretionary trust distributions to adults.
Following the release of a report on trusts and the tax system by RMIT University this week, shadow treasurer Chris Bowen said that Labor’s proposed trust tax would eliminate “tax loopholes” costing the budget “billions of dollars through tax, avoiding income tax shuffles including income splitting via beneficiaries”.
As a result of its poor judgement, Labor lost to the Coalition. So far, at least, only one of these losing policies has been dropped by the Australian Labor Party.
This was the one policy – among the four – that Labor did not take from the unelectable Greens. Now, 20 percent of households own an investment property, and mine is one. To show how precarious income can be when you’re not working full-time, I can reveal that the tenant I had in a property I own in Sydney’s southwest decided to vacate late last year. In January I had no income from that property but still paid a bill for water rates and this money had to come out of other income. In January the estate agent called me and told me he’d found a new tenant but that the rent would be $120 a week lower than before – this is due to Covid travel restrictions hitting the property market hard – or 30 percent. So I’d still have the same expenses attached to that property but the income deriving from it will now be lower.
The retirement of Labor’s franking credits policy is welcome news but work still needs to be done in order to reverse other punitive tax policies. The entire Australian equities market is geared to government policy, and accountants’ advice to clients is strictly linked to laws. For example, the reason that Australian equities surrender more profits as dividends to shareholders is linked to the existence of franking credits so here you have a case where companies frame their fiscal policies in order to fit in with laws that affect retirees.
If Labor’s franking credits policy had become law, what other aspects of tax law might’ve changed? Labor had framed its run-up to the 2019 election as the party of low incomes. Retirees have to deal with low incomes due to low interest rates as well as precarious income from other investments.
Who knows how the stock market will fare in 2022?
If it wants to win federally the party of the worker has to stop punishing those who prepare for their retirement and, instead, reward them for their foresight.
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