Written by Professor Bob Deutsch, CTA, Senior Tax Counsel
Sadly (for me at least), this will be my last Preamble for some time as I head off for much needed medical treatment. During my absence, the very capable Tax Policy and Advocacy team (Stephanie Caredes, Angie Ananda, Bruce Quigley and Spyro Papageorgiou) will produce the weekly preamble with some external input from one of our many tax industry leaders who chair our National Technical Committees. I hope to be back in early July with more to say than ever.
This week some myths that both sides of politics are propagating.
Myth No. 1 – Electing Labor will see a housing market collapse
I don’t think so!
Certainly the housing market will be dented by Labor’s proposals to restrict negative gearing benefits to newly constructed housing and to halve the CGT discount. The housing market will survive even if Labor manages to get both measures through the Senate, which is questionable.
In my view the choice is not a binary one - to restrict or not to? It is for more complicated than that and raises lots of questions. If restrictions will be successfully imposed by Labor:
- What asset classes will it apply to? – property, shares, bonds;
- Will it apply on an asset by asset basis or on a global per taxpayer basis?
- If a taxpayer has an excess of interest over rent what will he/she/it be able to do with the excess? - carry forward to later years to offset against future positive investment income (a fair result) vs. bury the excess in the cost base for CGT proposes (an unfair result).
Myth No. 2 – Electing the Coalition will spell the end of the progressive tax system
I don’t think so!
All this has stemmed from the Coalition’s long term plan to introduce a flat marginal tax rate on the band of income running from $50,000 up to $200,000. Labor has latched onto this to argue that a nurse earning $45,000 will pay the same rate of tax as an investment banker earning $195,000. Of course it is true that the marginal rate will be the same at these 2 levels but average effective rates will be very different with the nurse paying roughly $6,000 tax and the investment banker over $48,000. In other words, the investment banker will pay 8 times more in tax than the nurse even though his/her income is only 4 times more than the nurses income - that is progressive taxation at work.
Myth No. 3 – Labor will introduce an inheritance tax of 40%
I don’t think so - unless they are looking to quickly commit political suicide.
Nevertheless, there is a story doing the rounds to the effect that Labor has done a deal with the Greens to that end.
While appearing to be far-fetched how could this even be contemplated as a possibility. Well a little more understanding of the so-called “inheritance tax” is warranted. The term “inheritance tax” is tossed around with little understanding – essentially there are two ways this could be done.
One is strictly what is called an estate tax. An estate tax would be a tax that arises upon the death of an individual and is imposed on the estate before distribution to the beneficiaries. This tax could be, for example, anywhere between 2% and 10% of the total value in excess of $1m and is imposed on the estate. Thus, if the estate tax rate was set at 4% on everything above $1m:
- If someone dies with an estate worth $3m, estate tax of $80,000 would be payable by the estate;
- If someone dies with an estate worth $100m, estate tax of $3.96m would be payable by the estate.
The other option is an inheritance tax (strictly so-called) whereby each inheritor gets paid out his or her inheritance first and then that amount is included in his or her assessable income in the year of the inheritance receipt. Obviously, that means that a tax rate of anything up to 45% (maybe even 47%) could apply to the inheritance depending on the recipient’s other circumstances. That is where I suspect the 40% plus rate is coming from.
Many countries have had versions of estate taxes – UK, France, US for example. As far as I am aware no one has tried a true inheritance tax. I cannot imagine Labor having a political death wish, so I would rule out both!
Myth No. 4 – Coalition wants to dismantle Medicare
What does the Coalition need to do to knock this one on the head. Everything they have said and are saying and everything they have done and are doing has been designed to strengthen, not weaken Medicare. Medicare and the Medicare levy at 2% (or perhaps more) are here to stay whoever wins the May 18 poll.
Myth No 5 – Life will be more complicated under Labor than under the Coalition
This is probably true!
In reality I can see tax and tax law remaining as complex as ever irrespective of who wins the election.
Undoubtedly, if as is widely expected but by no means certain, Labor prevails in the House of Representatives and garners sufficient support from the Senate cross-benches to have their tax legislative agenda passed, things are likely to get a whole lot more complicated.
The legislative adjustments required to introduce:
The legislative adjustments required to introduce:
- negative gearing restrictions (with a carve-out for newly constructed property and pre-commencement date owned property);
- measures to tax discretionary trust distributions at a minimum 30% (with a carve-out for farm trusts); and
- measures to deny refunds of excess imputation credits (with a carve-out for “age pensioners” and certain SMSFs)
are likely to be complex, messy and time consuming for tax practitioners in ensuring clients are fully complaint.
That is the price we pay for more change. Ironically, it will mean higher fees for tax advice work which will run more and more people straight into Labor’s proposal to cap tax deductibility for the costs of managing one’s tax affairs to $3,000. I think I said enough about that last week!!
Concluding remark
As you can see there are lots of myths around and sorting out the truth from the myth is quite a challenge especially since both sides of politics tend to be quite reluctant to clear up a myth that is to the detriment of the other side. Hopefully some of the above has helped. If it has not or if any of it has angered you, you will enjoy the next few months of my absence.
Enjoy the election – I truly love seeing our great democracy at work – whatever the outcome, what an unbridled privilege it is to live in a country like Australia!
See you in July.
Next week, the Institute will publish on its Federal Budget website a summary table setting out the Coalition and Labor policies. Look out for it as it may help you understand the competing policies being offered.
Kind regards,
Bob Deutsch, CTA
