At this contemplative time, many people reflect on what has changed in the year past. But we don’t think you should ponder too long. It’s best to think about the future and about how this will affect you.
What are the likely and not-so-likely tax changes we should prepare for?
Start by looking at the context. The undeniable truth is that all government across Australia are short of money. They will be even shorter in the future as the economic tailwinds of massive mining investment tail off over the next few years, then company profits reduce and royalties drop, potentially unemployment rises leading to lower personal income tax receipts. The Treasuries know that the only way to balance the budget is by raising taxes (which is unpopular) or reducing spending. This is what we expect to happen – permanently lower government tax expenditure.
If you are thinking “it won’t affect me, they have never paid me a cent, I am always paying them” then think again. It’s not just handouts that are at risk. The government treats tax concessions, tax breaks and rebates as “expenses” in their annual budget. Most of us get at least something for nothing. Look for possible changes to:
Ever unpopular to change, the tax saving that investors receive from their loss making properties is a large tax expense for the government. “Never” or “Promise” are words easily forgotten when the chips are down. The pie on offer is huge and it doesn’t have to mean a complete removal of the tax break. Perhaps they could limit it like they have done with other concessions? For example, each individual could only claim up to $20,000 of rental losses with the rest carried forward, or maybe individuals with other income over a “magic number”, like $200,000, cannot claim negative gearing.
Pensioners paying zero tax on their savings and others paying only 15% may be a thing of the past. Consider this: what if pensioners instead paid a 10% withdrawal tax on all pension payments? Self managed super fund investors and members won’t be too happy but it’s a tempting middle ground to choose. Perhaps a 5% tax on income earned from pensioner assets too, and increase to 20% for the rest of us?
Private Health Insurance Rebate
This is the “silent change”. And it has started to happen. No-one receives the rebate in their pocket so you don’t feel it directly, but it is possible that there will be a reduction to the rebate and therefore an increase to your premiums payments. Already, families with income over a “magic number” (this time $168,000 combined) receive lower rebates. Expect this to trickle down further as this means testing becomes more accepted. There may be a time in the future when everyone with income over a “magic number” gets no rebate at all.
Unpopular as it would be, childcare centres are running at capacity around the country. How about the rebate reducing slightly? Maybe to 25% initially, then later on means tested like the other rebates. It could be sold as just another cost to be absorbed by the operators.
Structures and Trusts
If I do one thing one way, then the same thing another way, can I save tax? Sometimes. And the ATO doesn’t like that. They are worried that a lot of clever accountants and spending hours and hours devising structures to avoid tax. They recently released a publication targeting overly complex structuring of professional partnerships. The message is clear that if you have set up an overlay of entities where you could have structured your business more simply, then they will be suspicious. Potentially, they could target you for tax evasion where they find reason to do so.
Individuals and super fund members ordinarily receive a refund of their left over franking credits. Could this be scaled back? Perhaps a limit per person per year or per fund. Or even an elimination of franking credit refunds in a “use it or lose it” fashion, or a carry forward of franking credits to future years.
Capital gains tax concessions
Most of us never pay income tax on the increase in value of our family homes, which to many is their biggest asset. Most of us only pay half the regular tax on capital gains from investing. This harks back to the “means-testing” theme. The government will find it hard to increase tax for low income earners, but it may not be that hard to add a tax of the sale of family homes over a “magic number”, indexed for inflation? Like a 2% sales tax for homes over $2m, or an annual land tax, similar to council rates, of 0.1% of one’s land value. For investors selling capital gains tax assets, what if the CGT discount were reduced to 30%? Still a discount, but not likely to scare away investors used to the 50% discount (NB: Did you know foreign property investors already no longer get any discount?)
Various other stimuli
Economic stimulus measures often abound, like company loss carry back, small business tax breaks etc. Great ideas that sound good when announced but eventually cost money and are easily canned. Don’t think you can rely of concessions applying into the future, so if you need to use them consider using them sooner rather than later. The track record is clear that most of them don’t last very long.
We don’t mean to alarm you, but it is beneficial to think of what could be around the corner. A good tax system is a simple tax system, that is predictable and stable, but government forgets that and changes happen all the time.
Our professional opinion with tax planning is always this: “simpler is better”. You will find your situation is more predictable, less likely to be affected by change, and it’s easier to change tack if the wind blows the other way.
Happy New Year, and remember – Lucentor is always open to help you.