Labor may implement tax policies of negative gearing restrictions, reduction of the CGT discount, and ending excess dividend imputation if it wins government next year.

If you hold any investments you may be subject to Labor’s negative gearing restrictions which would likely be limited to newly-constructed housing. The restrictions would apply on a global basis.

For example, Ian obtains a loan to buy shares after Labor’s negative gearing restrictions come into effect, shortly after he receives an unexpected windfall and uses the money to purchase 2 properties. One of his properties is positively geared and one is negatively geared, while the shares are neutral. If the investment income exceeds total interest and deductions related to all his investments (ie 2 properties plus shares), then Ian will be able to deduct the full amount of the interest and deductions. However, if the total interest and deductions exceed the total investment income, the excess cannot be offset against other non-investment income and needs to be carried forward to be offset against future investment income or capital gains.

The policy would benefit those with multiple investments. As long as some of the investments are positively geared then there is still a benefit to be had. For the new “rentvesting” generation, this change may impact on any potential investments they may want to make in the future and quarantining of excess losses may need to be factored into investment decisions.

Labor is also planning to reduce the CGT discount for assets held longer than 12 months from 50% to 25%. Again, the changes will apply from a yet-to-be-determined date after the next election and all investments made before this date will be fully grandfathered, meaning that if you purchase an investment after the specified date and sell it after 12 months and the capital gains on the investment is $5,000, you could end up paying anywhere between $200 to $500 in excess tax depending on your tax bracket.

Labor’s election package also addresses the elimination of excess dividend imputation. This is denying individuals and super funds the right to receive a cash refund from the ATO if their imputation credits from dividends exceed the tax they have to pay, and is targeted at low-income earners, self-funded retirees not on the pension, and SMSFs without a pensioner member.

We can help you put plans in place that will minimise the potential impact of these changes.