There are also numerous outstanding super reforms introduced by the current Liberal National Government.

Naturally, until a proposal or change is finally introduced as law, it is should not be relied on as law. For example, there was a lifetime non-concessional contributions (‘NCC’) cap of $500,000 that was proposed to apply from the 2016 Federal Budget by the current Liberal National Government. This proposal was changed to a $1.6 million total superannuation balance (‘TSB’) cap in September 2016 following substantial adverse feedback.

Franking credits

Labor proposes to deny refunds for excess franking credits from 1 July 2019. This proposal would largely impact individuals and self managed superannuation funds (‘SMSF’).

Labor’s Pensioner Guarantee issued on 27 March 2018 stated that the distributional analysis shows:

• 80 per cent of the benefit accrues to the wealthiest 20% of retirees;
• 90 per cent of all cash refunds to superannuation funds accrues to SMSFs (just 10 per cent go to APRA regulated funds) despite SMSFs accounting for less than 10 per cent of all superannuation members in Australia; and
• The top 1 per cent of SMSFs receive a cash refund of $83,000 (on average) – an amount greater than the average full time salary (based on 2014-15 ATO data).

However, an individual who receives a Centrelink age pension, will be exempted from the proposal under Labor’s Pensioner Guarantee.

Under the Pensioner Guarantee:

• Every recipient of an Australian Government pension or allowance with individual shareholdings will still be able to benefit from cash refunds. This includes individuals receiving the Age Pension, Disability Support Pension, Carer Payment, Parenting Payment, Newstart and Sickness Allowance.
• SMSFs with at least one pensioner or allowance recipient before 28 March 2018 will be exempt from the changes. For example, if one member was receiving a part Centrelink age pension of $100 before 28 March 2018, the SMSF will be exempt under the proposal.

Interestingly, of the around 1,160,000 individuals who claim around $2.3 billion in cash refunds, 320,000 of them are expected to be exempt as a result of the pension guarantee. Accordingly, there will be around 840,000 individuals who will be subjected to the proposal.

In the context of SMSFs, there are around 420,000 people involved in such funds, with the funds receiving around $2.6 billion in refunds. Around $1.3 billion of these refunds is received by SMSFs that are in full pension mode with each of these SMSFs on average having assets in excess of around $2.4 million (almost 50 per cent of the $2.6 billion in refunds goes to SMSFs with considerably more than 41.6 million in super savings).

Large industry and retail superannuation funds will typically be able to offset any franking credits received against tax payable in each FY and will therefore generally not be adversely affected by this proposal.

The SMSF Association’s submission dated 29 October 2018 to the House of Representatives Standing Committee on Economics on the inquiry into the implications of removing refundable franking credits stated:

Under the proposed policy individuals with the same circumstances, in the same refundable position, will incur a different results depending on the vehicle they choose to hold their shares. Most notably, SMSF members are worse-off under the ALP policy than other superannuation fund members who are in pension phase and benefit from franking credits. The ALP policy proposes that refunds from dividend imputation are appropriate for almost all investors except for SMSF investors and those shareholders with low taxable incomes.

The SMSF Association’s submission also argued that the proposal will:

• Result in a change in asset allocation, eg, from Australian franked shares to international equities, property or more risky investments.
• Result in more members joining SMSFs to assist in soaking up franking credits. 

Some SMSF members will also consider whether having a pension in retirement phase is worthwhile if the fund is ‘burning’ excess franking credits. The example below shows that an SMSF with two members each with $1.6 million are no worse off converting to accumulation phase (i.e., commuting their account-based pensions) as they substantially reduce their franking credit wastage. The SMSF also accumulates greater assets for the longer-term in the concessionally taxed superannuation environment by not having to pay out annual pension payments to its members.

Note that there are many companies carefully examining what their optimal dividend distributions will be prior to 30 June 2019 given this proposal. Naturally, if a refund is available to individuals or SMSFs prior to 30 June 2019 (but not afterwards), then a greater distribution prior to this proposal being introduced may be more attractive.

There has been considerable press coverage of Labor’s franking credit proposal since it was announced. There has been recent speculation that Labor may cap the amount of refund to a maximum level above which no further refunds would apply.

Taxation of trusts

Bill Shorten in his ‘A Fairer Tax System For All Australians’ Media Release dated 30 July 2017 announced that:

- Labor will introduce a standard minimum 30% tax rate for discretionary trust distributions to mature beneficiaries (people over the age of 18).

- Under Labor, individuals and businesses can continue to make use of trusts – and trusts will not be taxed liked companies

- Labor’s proposal will not apply to certain trusts such as:

• Special disability trusts;
• Testamentary trusts;
• Fixed trusts or fixed unit trusts;
• Charitable and philanthropic trusts;
• Farm trusts (query what these are); and
• Public unit trusts (listed and unlisted).

Broadly, under the current law:

• Unit trusts do not pay any tax provided the trustee distributes its net income to unitholders prior to each 30 June.
• Where an SMSF is a unitholder of a unit trust, the SMSF trustee pays a maximum of 15 per cent tax on unit trust distributions.
• An SMSF will typically only pay 10% tax on unit trust distributions of net capital gains (after allowing for the one third CGT discount) on the disposal of assets held for more than 12 months.
• An SMSF in pension (retirement) phase does not pay any tax on unit trust distributions subject to each member’s transfer balance cap (TBC) limit.

While the Labor proposal is aimed at levying a minimum 30% tax rate for discretionary trust distributions to adult beneficiaries this proposal is not supposed to apply to fixed trusts, this is technically a very limited category of unit trust, with the vast majority of SMSFs investing in non-fixed trusts. It is important to consider what is meant by ‘fixed’ and what definition will apply.

Broadly, trusts are divided for tax purposes into fixed and non-fixed trusts for trust loss purposes under schedule 2F of the Income Tax Assessment Act 1936 (Cth) (ITAA 1936). There are strict criteria on what is a fixed trust under this test. Most other trusts fall into the broad category of non-fixed trusts and these trusts are broadly treated as discretionary trusts for tax purposes.

In relation to superannuation funds investing in unit trusts, the ATO currently do not administer the law in this strict manner but without clarity on Labor’s proposal, it is expected that the test that will be adopted by Labor would be the test in schedule 2F of the ITAA 1936 or a similar test.

Labor could therefore, unless SMSFs investing in non-fixed unit trusts are carved out, tax SMSFs at a minimum of 30% on trust distributions received from many unit trusts. This would have a significant impact on the net after tax returns that these trusts derive after the new trust’s tax regime proposed by Labor is introduced.

To explain by way of a brief example:

Non-fixed unit trust distribution to SMSF

A unit trust distributes $10,000 of net income to an SMSF unitholder.

Under current law:

The SMSF will generally pay $1,500 in tax (assuming no net capital gain is included).

Under Labor’s proposal:

The SMSF will pay $3,000 tax (assuming no net capital gain is included).

However, if the unit trust qualifies as a fixed trust, the tax should be $1,500 (ie, as under current law).

It is noted that if the unit trust is non-fixed, the ATO currently administer the law in a more practical manner as outlined in TR 2006/7. Broadly, provided distributions by the unit trust are made proportionately based on unitholding proportions, rather than based on a discretion, the ATO will typically not apply a 45% tax rate under the non-arm’s length income rule in s 295-550 of the Income Tax Assessment Act 1997 (Cth).

Chris Bowen as quoted in the Financial Review on 11 August 2017 stated:

The claim that self-managed super funds could be hit by Labor’s trust proposal (‘SMSFs could be hit by Labor Trust proposal, August 9) is simply wrong…

 …Labor’s policy to apply a minimum rate of tax on certain distributions targets income splitting and will not have any impact on fixed unit trusts, including non-geared unit trusts owned by superannuation funds. Technical legal classifications between fixed versus non-fixed trusts are longstanding issues readily resolved within the taxation system and completely distinct from Labor’s announcement to curb income splitting through discretionary trusts

For guidance on how the ATO currently administers this area, refer to TR2006/7 and PCG 2016/16. Unless an appropriately drafted unit trust is obtained upfront, there can be considerable downstream hurdles with seeking to change a non-fixed trust to a fixed trust, including duty, land tax and other potential implications, especially if the ATO change its current administrative practice.

The Tax Institute’s Senior Tax Counsel, Bob Deutsch, has also noted that it is still uncertain how Labor’s policy on how it proposes to tax trust trust distributions will apply in practice. For example, will the general CGT discount apply, will any tax offset apply like a franking offset in respect of a dividend from a company, and what types of trusts will be considered fixed and non-fixed?

Moreover, Labor’s policy has created considerable uncertainty for investors and business people seeking to undertake investments or enter into new business structures given this broad brush proposal. A discretionary trust has been a popular ‘structure’ to accumulate assets and to operate a business in but in view of Labor’s proposal many may now want the greater certainty offered by a company given the future outlook for trusts is so uncertain.

Labor should therefore urgently provide clearer guidance on its trust’s tax proposal especially on what trusts will be carved out of its proposal.

Superannuation guarantee

Labor propose to increase the current superannuation guarantee charge rate from 9.5 per cent to 12 per cent as soon as practicable instead of the current gradual increase – which is already law to 12 per cent from 1 July 2025 – see table below. Should this be achieved, Labor then proposes to achieve its original objective of increasing the minimum rate to 15 per cent. 

Labor will also pursue policies that seek to reduce the extent of unpaid superannuation in Australia, and seek to improve the ability of workers to recover their unpaid superannuation as an industrial right.

Non-concessional contributions cap

Labor will lower the annual non-concessional contributions (NCC) cap from $100,000 to $75,000.

Naturally, this impacts the bring-forward cap which will reduce from $300,000 to $225,000 (i.e., 3 x $75,000).

Naturally, NCCs are subject to the $1.6 million TSB limit.

Division 293 threshold

The threshold at which high income earners pay additional contributions tax will be lowered from $250,000 to $200,000.

Rolling 5 year catch-up concessional contribution cap

Members with a TSB of less than $500,000 are currently permitted to make additional concessional contributions (‘CCs’) where they have not reached their CCs cap in the prior five FYs. This can effectively equate to a rolling five year average CC cap of up to $125,000 that can be made in one FY where the member in year 5 has made no CCs in the prior four FYs commencing after 1 July 2018.

For example, if a member and their employer only contributes $10,000 of CCS in FY2019, the member will effectively have an unused CC carry forward cap of $40,000 in FY2020 (ie, $15,000 unused CC cap in FY2019 plus a $25,000 CC cap in FY2020).

Tax deduction for personal superannuation contributions

Labor propose to reintroduce the 10 per cent rule to restrict personal contributions.

By way of background, under current law individuals, regardless of their employment circumstances, can make CCs up to the CC cap following the removal of the 10 per cent test on 30 June 2017.

As you may recall, broadly, the 10 per cent test prior to 30 June 2017 precluded individuals from claiming personal superannuation contributions where they earned more than 10 per cent of their overall earnings was from employee type activities.

For example, under current law, if an employer makes superannuation contributions of $10,000 on behalf of an employee, the employee may make an additional $15,000 of personal CCs to superannuation, and claim a deduction for this amount despite having 100 per cent of their earnings from being an employee (subject to having sufficient taxable income to offset the deduction).

Note that the $1.6 million TSB test does not restrict CCs but does limit NCCs when the member’s TSB exceeds the $1.6 million threshold. 

Low income superannuation tax offset

The ALP’s 2018 National Platform, ‘A Fair Go for Australia,’ states that Labor will maintain a low income superannuation tax concession (currently called the low income superannuation tax offset, ie, ‘LISTO’) and will develop policies that will further support low income earners to save for their retirement. Further, Labor will review the interaction between the age pension and superannuation.

Low income earners may receive a tax offset of up to $500 per FY on their CCs to help them save for their retirement. Broadly, to be eligible for this payment, the member’s adjusted taxable income must not exceed $37,000 and 10% or more of the member’s total income must have been derived from business or employment.

Ban new LRBAs

Labor is committed to banning SMSFs entering into new limited recourse borrowing arrangements (‘LRBA’). As part of Labor’s housing affordability policy, in April 2017, it announced that it would ‘restore the general ban on direct borrowing by superannuation funds, as recommended by the 2014 Financial Systems Inquiry’. A media release by Bill Shorten at this time noted that this would ‘help cool an overheated housing market, partly driven by wealthy SMSFs’.

Pension exemption limit of $75,000 p.a.

Mr Chris Bowen in his ‘Positive Plan to Help Housing Affordability’ media release on 18 January 2019 stated that Labor has already acted to reduce the generosity of tax concessions for high income superannuants – to moderate concessions for Australians with superannuation balances in excess of $1.5 million. This item was published in SMSF Adviser’s news on 23 January 2019 which noted that Labor first announced this $1.5 million limit in April 2014.

If elected, it would appear that there is the prospect that Labor will further limit the tax exemption for earnings on superannuation balances in pension phase that exceed $1.5 million. While it has never been clear how this proposal would actually operate in practice, it is broadly understood that earnings on assets supporting income streams in retirement phase will be tax‑free up to $75,000 p.a. for each member (note that a 5 per cent p.a. yield on $1.5 million of pension assets equates to $75,000). However, earnings above $75,000 would be taxed at 15 per cent.

It is also expected, based on a prior Labor announcement, that assets acquired prior to the start of this new regime will be grandfathered for capital gains tax (CGT) purposes. Broadly, under this announcement it would appear that net capital gains on assets acquired after this new regime commences would be added to the income earned subject to the $75,000 exempt earnings threshold in respect of each financial year (FY).

An example from a prior Labor Fairer Super Plan noted that a 63 year old retired lady called Susie with $1.8 million invested in super who received a $90,000 pension (reflecting a 5% yield), would pay 15 per cent tax on $15,000 of her pension amount above the first $75,000 tax free amount; excluding applicable levies.

While there has been recent media coverage of this proposal, I am not convinced this proposal will be introduced as initially outlined. Given the $1.6 million transfer balance cap (‘TBC’) is now firmly implemented with all its associated machinery and appears to be largely working as planned, I suspect that Labor may not want to introduce a whole new system that may prove very difficult in practice to implement and operate. If any further limit on the pension exemption is introduced, I suspect it will be to reduce the $1.6 million TBC amount or to freeze any future indexation of the general $1.6 million TBC threshold. Recall that the $1.6 million TBC amount will be indexed in $100,000 increments in line with CPI.

Limit negative gearing

Labor stated in its ‘Positive plan to help housing affordability’ that it will limit negative gearing to new housing from a yet-to-be-determined date after the next election (which is expected to be 1 July 2019). All investments made before this date are not be affected by this change and will be fully grandfathered.

This will mean that taxpayers will continue to be able to deduct net rental losses against their wage income, providing the losses come from newly constructed housing.

From a yet-to-be-determined date after the next election (which is expected to be 1 July 2019) losses from new investments in shares and existing properties can still be used to offset investment income tax liabilities. These losses can also continue to be carried forward to offset the final capital gain on the investment.

Bob Deutsch, CTA and Senior Tax Counsel of The Tax Institute confirmed in The Tax Institute’s blog ‘Labor’s negative gearing restrictions – how might they work?’ (23 November 2018) that the Labor Party’s proposed changes to negative gearing would apply across the board to all investments. Previously it was thought that Labor’s negative gearing restrictions might only apply to property investment.

Bob Deutsch’s article states:

So, to the proposals themselves – after some interrogation of the Labor party, I have been able to confirm that Labor’s restrictions on negative gearing will apply (after a yet-to-be announced commencement date) to all investments and it will apply on a global basis to every taxpayer. In other words, it will apply to property and shares alike (and any other relevant asset classes) and it will apply by looking at a taxpayer and assessing their overall investment income as measured against their overall investment interest expenses.

Both these points are critical to an understanding of what is proposed, and while Labor has previously hinted at both outcomes, I can now confirm that the policy design will be precisely along these lines.

After examining three different practical examples, Bob Deutsch’s article states:

…, the key to dealing with the proposed fallout from Labor’s restrictions on negative gearing – management of portfolios in order to have regard to the restrictions on negative gearing, will become crucial. 

In addition, purchasing properties in the name of the family member best able to manage any negative gearing restrictions will also be vital.

Naturally, this proposal may encourage taxpayers to enter into negative gearing strategies before Labor’s negative gearing restrictions are introduced.

CGT discount

Labor propose to reduce the 50% general CGT discount available to individuals on asset disposals where the asset has been held for more than 12 months under div 115 of the Income Tax Assessment Act 1997 (Cth) to 25 per cent from 1 July 2019.

Labor has stated in its ‘Positive plan to help housing affordability’ that:

• All investments made before this date will not be affected by this change and will be fully grandfathered.
• This policy change will also not affect investments made by superannuation funds.
• The CGT discount will not change for small business assets. This will ensure that no small businesses are worse off under these changes.
• Labor will consult with industry, relevant stakeholders and State governments on further design and implementation details ahead of the start date for both these proposals.

Bob Deutsch’s article states:

The practical effects of these housing affordability policies are not yet clear. For example, investors might sell properties in the basis that, due to these incoming laws, property investment may be less attractive in the future leading to lower prices. Conversely, investors may decide to hold on to grandfathered assets to enjoy the expected capital gains on that asset rather than sell, which could lead to less properties for sale.

As you would be aware, superannuation funds are only entitled to a one third CGT discount on assets held for more than 12 months (broadly to the extent the pension exemption does not apply). Labor has noted that the CGT discount applicable to superannuation funds would not be reduced.

Deductions for tax advice

Labor propose to limit deductions for tax advice to $3,000 a year. Individuals, SMSFs, trusts and partnerships are to be subject to the cap while companies would not be.

We query if this limit will apply on a per entity basis or whether it might apply on an aggregated ‘associated’ entities basis. It can often be difficult, for example, to determine where advice for an individual ends and advice for their ‘associated’ entities begins.

Paul Drum, CPA Australia, head of policy, believes:

… this proposal needs a lot more work as many Australians go through significant one-off life events such as a divorce, inheritance or retirement, when they require specialist advice that could cost well over $3,000. Simply carrying out proper planning for large life events such as commencing a business or working overseas could easily exceed this cap. This sort of planning is necessary to ensure tax laws are properly followed and taxpayers don’t fall foul of the ATO.

In an article available via the Financial Review, the Institute of Public Accountants president Andrew Conway, is said to be ‘vowing to mobilise the large accounting workforce to oppose the measure in the lead up to the next election’ (‘Accountants vow to campaign against $3000 cap on managing tax affairs’, 13 January 2019).

It is yet to be determined if this limit will include litigation costs, ATO audit costs and ATO interest payment costs. There have also been calls for a small business concession to be applied.

With so many other proposed changes to tax laws likely to require advice, many would exceed this cap simply trying to understand these changes and manage their affairs accordingly. In particular, responding to an ATO review or audit, which is becoming increasingly likely for many more taxpayers, typically easily exceeds a $3,000 threshold.

Further policy proposals

Labor also has planned policy releases leading up to the election which are not yet publically available. Namely, as outlined in ALP’s 2018 National Platform, ‘A Fair Go for Australia,’ Labor proposes to:

• Ensure that the superannuation guarantee is legislated to become part of the national minimum employment standard (NES) so that it is enforceable as an industrial entitlement. Broadly, this will, among other things, give employees access to the Fair Work Commission and pursue other industrial remedies for unpaid superannuation guarantee contribution.
• Maintain a low income superannuation tax concession (currently called the LISTO) and will further support low income earners to save for their retirement. Labor will review the interaction between the age pension and superannuation.
• Implement policies that work towards closing the significant gender gap in superannuation savings, including eliminating the $450 minimum threshold for compulsory employer contributions.
• Labor will, within the first 6 months of taking office, initiate an expert review to examine the adequacy of mechanisms to strengthen the superannuation balances of women, including options for government contributions to account balances where the account balance is very low.
• Legislate to provide superannuation contributions on the Federal Government paid parental leave scheme.

General observations

A number of Labor policies are proposed to commence by 1 July 2019 or following the election, when an announcement is made. However, in view of the election being likely to take place in May to August this year, it may be difficult for Labor to introduce any changes with a 1 July 2019 commencement date.

LIBERAL  PARTY POLICIES

As this article is intended to consider Labor’s polices, we will only briefly mention the Liberal party’s policies. Many of these can be found in the ‘Protecting Your Super package’ currently being considered, which proposes changes affecting large super funds and includes:

• A requirement that a third of directors on the board of industry super funds are ‘independent’.
• A requirement that super fund members below 25, have low balances or have not contributed in 13 months would have to opt-in for insurance cover.
• Allowing the ATO to manage and combine super accounts with balances below $6,000.
• Introducing a cap on fees charged to low balance accounts and banning exit fees.

The Liberal party has also proposed a requirement that a third of directors on the board of industry super funds are ‘independent’.

In relation to SMSFs, it has previously been announced that the Liberals would increase the number of total SMSF members allowable to six.

CONCLUSIONS

If Labor are elected, there will be considerable superannuation and tax reforms that are likely to have wide ranging impact and are likely to take several years to finalise and properly implement. Most people will have to adjust their superannuation and tax planning, especially their SMSF succession planning, and are best positioned to do so if they monitor and keep on top of the changes. There are strategies that can be implemented ahead of these proposals becoming law (possibly, for those who do not like risk, implemented before the next Federal election) and expert advice should be obtained as needed.

In Australia, there is one certainty in superannuation and tax law –– constant change. Invariably the devil is also in the detail. We understand from a number of leading tax academics that Australia has a reputation for being one of the most complex tax systems in the world and probably ranks second to the USA. The constant ongoing complex changes to superannuation and tax rules will keep Australia as a leader in complexity.

Daniel Butler, director and Shaun Backhaus, lawyer, DBA Lawyers