Overwhelmed by the tax rhetoric delivered by the Australian Labor Party (ALP)?
You are in the right place.
The following commentary breaks down the ALP’s tax implementations and how they impact individuals.
Cap on tax agent fee deduction
In May 2017, Bill Shorten announced that if the ALP was elected, a cap of $3,000 on an individual’s deduction for managing tax affairs could be implemented.
Touted as a broader policy measure to limit tax avoidance by high net wealth individuals, the cap will see a major change from the current state where individual taxpayers can claim unlimited deductions for managing their tax affairs.
Details on the proposed tax cap rules are limited at this stage. What we can surmise, however, is that the cap could discourage taxpayers from seeking legitimate tax advice in respect of their tax affairs. This potentially and dangerously leads to non-compliance in a heavily regulated tax environment with strict penalties.
Many Australians will at some point require complex tax advice. Obtaining specialised tax advice in respect of residency, Capital Gains Tax and relationship breakdowns or simply just completing an Income Tax Return with a number of rental properties has the potential to set an individual taxpayer back more than $3,000.
Under the proposed changes, individuals may be denied a tax deduction of any excess over $3,000 without bearing in mind the legislation increases in complexity each year.
The proposed policy may discourage taxpayers from ensuring their lodgements are up to date and force taxpayers to limit detailed advice to a fee of $3,000. This has the potential to leave them with significant economic losses if the advice is incorrect.
Limiting deductions before reducing the complexity of the tax system is definitely counterintuitive.
Individual tax cuts
Prior to the 2019 budget announcement, the current Government legislated the following tax cuts in three stages:
Stage 1: From 1 July 2018, the Coalition increased the top threshold of the 32.5% tax bracket from $87,000 to $90,000 providing a tax cut of up to $135 per year to about three million people.
Stage 2: From 1 July 2022 the highest threshold of the 32.5% tax bracket will be increased from $90,000 to $120,000 providing a tax cut of up to $1,350 per year for individuals in this tax bracket.
Stage 3: Then from 1 July 2024 the highest threshold of the 32.5% tax bracket will further increase from $120,000 to $200,000 removing the 37% tax bracket entirely.
If the ALP is elected, Stage 1 of the tax cuts will be maintained, however, Stage 2 and Stage 3 will be abolished resulting in less relief for high-income earners.
Further tax cuts – 2019 Budget announcement
In April, the current Government announced the low-and-middle income tax offset (LMITO) will be increased while awaiting the transition of the lower tax rates mentioned below. Individual taxpayers earning up to $37,000’s LMITO offset will increase from $200 to $255 from 1 July 2018 and Taxpayers earning between $37,000 and $90,000 will receive a maximum offset between $530 to $1,080.
The Government also announced it would flatten tax brackets by 2024 reducing the 32.5% tax bracket to 30%.
This will mean that all taxpayers earning between $45,001 and $200,000 could have their tax rate reduced to 30% (excluding the Medicare levy).
Taxpayers who earn over $200,000 will be taxed the top marginal tax rate of 45% (excluding the Medicare levy).
The opposition’s view
On April 4, Bill Shorten agreed with the Coalition’s $1,080 tax cut.
The ALP went a step further for those earning below $45,000 a year, promising the lowest income taxpayers will get a $350 a year cut compared to the Coalition’s $255 cut.
The ALP will not proceed with the July 2022 and July 2024 changes which proposed to result in individual taxpayers paying no more than 30% tax. The ALP intends to increase the top personal tax rate for four years from 45% to 47% (49% including the Medicare Levy) for those individuals whose taxable income exceeds $180,000.
This will be increased by an introduction of the Temporary Budget Repair Levy from 1 July 2019 of 2% which was abolished by the Coalition from 1 July 2017.
The ALP do not intend to increase the Medicare levy currently set by the Coalition.
It is clear that the Coalition’s budget and Opposition’s view offer two distinct views when it comes to taxing high-income earners. We wait with breath that is bated, to see how the intentions for tax will play out given the variance in political views.
All being said, it is imperative to ensure you seek appropriate advice for all taxation issues, given the complexity of our tax system and to ensure compliance.
For more information
If you require further information or have any questions, please contact your local RSM adviser.