Labor’s tax tsunami is about to hit

The Wentworth by-election was a wake-up call for all private business owners in Australia. If you thought the Labor government only had a chance of winning the next federal election, you would have sharpened your odds to put them as a clear favourite to win on 18th May 2019.

 

Since the by-election, I have been asked by several business owners what a change in government would mean for them. Although we have no detailed policy, Labor has release a blueprint of their tax policies over the last 18 months. Much of recent discussion has focused on the changes to imputation credits, however there are far more significant policies that will affect business owners, particularly on a divestment of their business.

 

The majority of business owners hold the shares in their business via a discretionary trust (ie a family trust). Under the current tax regime, the maximum tax payable on divestment of shares in a private business would generally be 23.5%. The CGT discount allows individuals to reduce their tax rate by 50% (ie 47% x 50%).

 

Labor has announced several tax policies that will change this. These include:

  • Minimum tax rate of 30% on discretionary trust distributions to adult beneficiaries.
  • The CGT discount would be reduced for individuals to 25% (existing assets to be grandfathered).
  • Reintroduction of the Budget Deficit Repair Levy of 2% for those taxpayers with taxable income in excess of $180,000. This would take the highest marginal rate to 49%. In addition, a 0.5% increase in the Medicare levy would take it to 49.5%.

Under Labor’s proposed policies, where shares owned by a discretionary trust are sold, the tax rate on the gain would be a minimum of 30%. This equates to a tax increase of 6.5%. This could be significantly higher should tax policies associated with the flow through of capital gains be also changed.

 

The devil will be in the detail, however there are enough warning signs to suggest Labor’s philosophy on tax reform will be focused on removing any tax concessions which they consider to eat away at the revenue base.  You have been warned.