As we edge closer and closer to the upcoming federal election, many are beginning to wonder what the outcome will mean for the fate of the nation – and specifically, what it will mean for the country’s business high achievers.
While few could mount a plausible argument for current Prime Minister Scott Morrison and his Liberal Party to deserve a further chance to run the country, given the deplorable performances over recent months and years, the alternative could have far-reaching consequences beyond a few short-term tax increases.
The election result could have far-reaching consequences beyond a few short-term tax increases
In fact, under Opposition Leader Bill Shorten, those who are financially successful or are aspiring to achieve financial success are predicted to feel the full weight of the change should the Labor Party’s controversial new policies come into effect.
Described by many as the ‘war on wealth’, Labor has a laundry list of proposed tax changes which directly target Australia’s financially successful, and are expected to have serious ramifications for those within the business community.
The outcome of the election will be an interesting commentary as to what Australians consider to be ‘fair’, and how importantly we as a society view the right to aim for business success and financial independence.
Back in 2014, Adam Creighton penned a particularly interesting article in The Australian titled ‘No, the rich don’t pay a ‘fair share’ of tax. They pay all of it’. Discussing what many had long suspected to be the case, Creighton’s article outlined how only those earning more than $200,000 a year (less than 20% of the population) actually make a net contribution to the public purse, after allowing for the value of all the benefits received from the government.
However, if Labor wins, it seems this ‘fair’ distribution is only going to get ‘fairer’ – and the nations top contributors will be required to pay more, while standing to gain considerably less. Let’s take a look at Labor’s proposals and consider the implications.
A disincentive to save, invest, take risks and aim to achieve financial independence if ever we saw one!
Remove the ability to offset losses on investments
As one of the most notable reforms, Labor is looking to scale back on taxpayers’ ability to offset losses on investments against other income. Many consider this policy purely in relation to negative gearing of property investments, but it actually extends much further.
They have announced that where the costs incurred in relation to any investment exceed the income, the loss will not be permitted to be offset against any other income.
This is a dramatic change to one of the fundamental principles of Australian tax law. Without it, the risk associated with investing will expand dramatically.
Anyone who has ever taken a risk in relation to an investment or business venture will understand the vital importance of being able to offset initial losses against other income. Without this ability, most could never undertake the investments and bear the risks required in order to seek future financial success.
Those most impacted by this change will be Australia’s small business owners, given family trusts are a highly common structural element.
Reduce capital gains tax discount
Another important proposal to be aware of is the reduction in the capital gains tax (CGT) discount. Currently, long term investors are eligible for a 50% discount on CGT, but Labor wants to reduce this to 25%.
Or, to put it another way, you will pay one and a half times the tax on any profit you make from long term investments under Labor’s plan.
A disincentive to save, invest, take risks and aim to achieve financial independence if ever we saw one!
Prohibit refunds for excess imputation credits
Under Labor’s policy, excess imputation credits, otherwise known as franking credits, will no longer be refundable resulting in an effective tax increase to those who may have previously received such a refund.
In particular, this is likely to hit those with Self-Managed Super Funds and self-funded retirees hardest, though it would also have a considerable impact on many small business owners as well.
Taxing of family trusts
Another area that is concerningly coming under fire, is the tax treatment of family trusts.
Under existing rules, family trusts do not pay tax in their own right. Income is instead distributed to family members and they in turn are taxed on the income received.
Labor instead plans to start taxing trusts before the income gets to its intended recipients.
As a result, the ability to spread income across a family group who are involved in running a business will be substantially curtailed. The likely result is a significant increase in overall tax paid, as well as bringing forward tax payment due dates.
Currently, the polls are telling us Labor are going to walk it in come election day. But, given the above points and their broader implications, perhaps it is worth considering your own stance as to each Australian’s right, and incentive, to succeed and prosper. It’s a decision which may have higher importance and greater potential long term consequence than you may initially expect.