The ALP is proposing a raft of tax changes that will negatively impact after tax outcomes for many Australian investors should they be enacted.
Arguably the most controversial is the removal of cash refunds of franking credits, but they are also proposing to tax discretionary trust income in the hands of individuals at a minimum 30% tax rate, halve the capital gains tax (CGT) discount for individuals and limit negative gearing to new housing only.
The franking and trust changes are not grandfathered, whereas the CGT and negative gearing changes are, only applying to new investments from a date yet to be announced. The top marginal tax rate for individuals is also to be raised by 2%. In this paper we consider the impact of these changes.
The biggest increases in tax are the effective 30c in the dollar reduction in the value of fully franked dividends and discretionary trust income for tax-exempt investors (pension phase SMSFs and very low-income individuals) who will not be able to reclaim franking credits and these changes are not grandfathered.
The second biggest increase is the effective 13.3c in the dollar hike in CGT for the highest marginal tax rate individual, with CGT rates rising across the board for all taxed individuals. Low marginal tax rate individuals (19c plus Medicare Levy) also receive a not insubstantial 9c in the dollar increase in effective taxes on fully franked income and discretionary trust income.
Will these changes significantly impact returns?