With a Federal Election on the horizon, many people are starting to consider how a possible Labor government could affect tax policy.

The Labor party has already announced a number of key tax policies. While these are dependent on Labor winning the next election, as well as the passage of legislation through Parliament, it is worthwhile thinking about the impact of these proposed changes.

Imputation credits

Perhaps the most controversial announcement has been the plan to limit tax refunds from excess franking credits from 1 July 2019. When Australian companies pay dividends to shareholders, they can attach a franking credit for tax paid on company profits.

Currently, Australian residents, superannuation funds and charities can claim a refund if the total franking credits received exceeds their tax liability. The Labor party intends to limit those who can receive a refund to charities. Individuals and superannuation funds will still be able to apply franking credits to reduce their tax liability, but will not be entitled to receive a refund.

Negative gearing

Currently, investors can offset losses resulting from negatively geared investments against their other income, including any salary or wage income. Investors are entitled to claim a tax deduction for any expenses incurred in the course of earning their investment income, including interest paid on borrowings. For property investors, it also includes depreciation and capital works deductions. If these deductions exceed the income received, the investment is referred to as being negatively geared.

Under Labor policy, losses from negatively geared investments will only be applied to other investment income. If the deductions still exceed the income, the remaining loss can be carried forward to offset future investment income, or capital gains realised from the sale of the investment.

It is proposed to exclude losses made on newly constructed houses. Labor has not advised a start date for this measure, however, losses from investments entered into prior to the start date will still be able to offset income from all sources, in line with the current rules.

Capital Gains Tax discount

Australian resident individuals and trusts are entitled to reduce the taxable capital gain realised on the sale of assets by 50 percent, provided that they have held the asset for more than 12 months.
However, under the Labor policy, this 50 percent discount would be reduced to 25 percent.

Small business assets would be exempted from this change, and continue to be eligible for a 50 percent discount, together with the small business capital gains tax concessions.
Superannuation funds would still be eligible for the current 33.33 percent discount.

As yet, there is no proposed start date for this measure, however, assets acquired prior to the start date will continue to be eligible for a 50 percent discount.