s22 I-1876 Documents - Pa 91 TAX-- NEGATIVE CAPITAL GAIN BACKGROUND: s22 s47G modelling ofLabor?s proposed Hega rive gearing and GT reform: s47G . . . . .. . found that negative gearing benefits high income families, With 52.6 per cent of the tax benefit going to the top 20 per cent of incomes and only 5.2 per cent of tax bene?ts going to the bottom 20 per cent of incomes. 47G also found that the CGT discount ovenvhelmingly bene?ts high income families, with the top 10 pet cent accounting for nearly three quarters of the tax savings. - By removing the effect of the large one-off bene?t coming from capital gains, 8 47G estimates that ?gure drops to 54.3 per cent of the tax savings ?owing to the top 10 per cent of families, as ranked by income. On Labor?s negan've geai?ing policy 5 47G found that removing negative gearing will increase revenue in the long run between 4 and 9 billion a year depending on the increase in new housing construction flow ing from the new housing exemption. - . s47G . . On Labor?s CGI pohcy, found that reducmg the CGT discount from 50 per cent to per cent would increase revenue by an estimated $2 billion in the long run in 2017-1 8 dollars. FOI 1876 - Documents - Page2 Under Labor?s policy, roughly two thirds of the tax revenue would come from the removal of negative gearing and the remajrrder from halving the CGT discount to 25 per cent. 3 22 FOI 1876 - Documents - Page3 522 Yes that is cowect. 522 22 a point to clarify, as discussed, reflecting that there?s no net income because it?s a net rental loss. not be able to use that loss to their reduce taxable incomeclaim that loss and in police officer earning $90,000 and hoping to claim a $10,000 loss on a newly purchased es ablished house wouid IL t'a'xr'l +rx ra-mr i??v nn thr- UYUUKU KIL-V LU Isl?, Ruf\ Ull Ho+ rvn-nnr: Han 17th Vi? L??y Cheers, s22 FOI 1876 - Documents - Page4 522 FOI 1876 - Documents - Page5 22 FOI 1876 - Documents - Page6 22 22 . we?d instead suggest: The ALP policy to halfthe CGT discount would, in effect, increase the capital gains tax liability for most individuals by 50%. The reason for the change is that the reduction in the discount might move some taxpayers into a higher tax threshold (as the d?scounted capital gain is included in taxabie income). Also, taxpayers with small capital gains and income below the tax?free threshold may be unaffected by the reduction in the discount (Le. still pay no tax). Apologies for the delay happy to discuss, 22 FOI 1876 - Documents - Page7 s22 5? 22 passed on your request for information on the treatment of different assets under Labor?s negative gearing policy. We have provided some basic examples, however we have limited these examples to property and shares. Happy to discuss if this isn?t what you were after. 522 Salary and wage income Other net investment income Shares} Rental income Assessable Income Interest expenses (Investment property) Other deductible expenses Total deductions Net rental loss Allowable deductions Taxable Income difference Difference in tax payable (inc MI.) Assumptions Net rental Ioss of $30,000 $30,000 rental income - $60,000 deductions Marginal rate of 47 per cent includes medicare levy Rental income is derived from an existing property purchased after 1 My 2017?. FOI 1876 - Documents - Page8 indiyi'eilas'r?wjth?other? investment Notes moan, . FOI 1876 - Documents - Page9 522 As requested, the attached document outlines the impact of the negative gearing and CGT policy on Australian Residents and Non?residents, as weli as the broader impacts of this policy. This information is based on our understanding of Labor?s policy from the ALP policy doc and subsequent media releases. Regards 22 FOI 1876 - Documents - Page10 s22 FOI 1876 - Documents - Page11 Impact on investment in asset classes Labor?s negative gearing and CGT changes investment asset (acquired after 1 July 2017) impact of Labor?s policies on Australian Residents Impact of Labor?s policies on Non? residents impact of Labor policies on prices Share investments A?ected. The after?tax returns on share investments will be reduced for Australian residents: Investors will not be able to use net investment losses on shares to offset salary and wage income, deferring those losses to a later point in time. However, less impact than for property due to lower loan to value ratios for margin loans. CGT discount will also be reduced to 25 peir cent. Minor impacts only. Non-residents do not benefit from the CGT discount. While non?residents may be affected by changes to negative gearing, they are unlikely to have non~investment income to offset losses against. Unlikely to change. After?tax returns for Australian resident investors will fall under the policy. However, prices are unlikely to be impacted as returns are unchanged for foreign residents, who are likely to be the marginal investors. Although asset prices are unlikely to change, the composition of ownership may change. Commercial property (all) Affected. The after-tax returns on commercial property investments will be reduced for Australian residents: Investors will not be able to use net investment losses on commercial property to offset salary and wage income, deferring those losses to a later point in time. Minor impacts only. Non?residents do not benefit from the CGT discount. While non-residents may be affected by changes to negative gearing, they are uniikely to have non~investment income to offset losses against. Unlikely to change. After?tax returns for Australian resident investors will fall under the policy. However, prices are unlikely to be impacted as returns are unchanged for foreign residents, who are likely to be the marginal investors. Although asset prices are unlikely to change, the composition of ownership may change. FOI 1876 - Documents - Page12 CGT discount will aiso be reduced to 25 per cent. Unclear from Labor?s policy docs whether or not their proposal would apply to all investments in commercial property, orjust investments in existing commercial properties. Residential investment property (existing) Affected. The afterwtax returns on existing residential property investments wili be reduced for Austraiian residents: investors will not be able to use net investment losses on existing properties to offset salary and wage income, deferring those losses to a later point in time. CGT discount will also be reduced to 25 per cent. Minor impacts only. Non-residents do not benefit from the CGT discount. Whiie non?residents may be affected by changes to negative gearing, they are unlikely to have non-investment income to offset losses against. The ALP policies could introduce some downward pressure on property prices in the short term, particulariy if the commencement of the policy coincides with a weaker housing market. in the longterm, increases in taxation on rental property could have a relatively modest downward impact on property prices. Returns for Australian resident investors will fall under the policy. However, owner- occupiers who are unaffected by the changes are likely to limit the extent to which there is an impact on prices. in fact, the impact of the poiicy on investments in other asset classes, such as shares, may see investment in owner~ occupied housing increase. Grandfathering and the high transaction costs (stamp duty) for transacting in this market may also impact upon the extent to which adiustment takes place. As with other markets, foreign investors may have a moderating in?uence on price, though perhaps a little iess so, given the restrictions on foreign investment in existing residential real estate. More broadly, previous changes to negative gearing (1985-1987) and FOI 1876 - Documents - Page13 the introduction of the CGT discount (1999) had little discernible impact on the market, though the housing market itself has historically been highly cyciical and it is possible that uncertainty arising from the policy change itself could compound upon a cyclical downturn that may be underway at the time. Overall, price changes are likely to be small, though the composition ofownership may shift away from domestic investors. Owner occupied housing Not affected. Does not apply. The ALP policies could introduce some downward pressure on property prices in the short term, particUlarly if the commencement of the policy coincides with a weaker housing market. in the long term, increases in taxation on rental property could have a reiatively modest downward impact on property prices As the after-tax returns for Australian investors in other assets such as shares and property will fall due to the reduction in the CGT discount, households may increase their investment in owner-occupied housing which remains exempt from CGT. This would tend to counter any downward pressure on prices arising out of the rental market. Bonds Minor impacts only. While these investments provide an income stream, it would be very unusuai for investors in these products to borrow to fund their investment. Not affected. After?tax returns for Australian resident investors wiil fall under the poiicy. However, prices are unlikely to be impacted as returns are unchanged for foreign residents, who are likeiy to be the marginal investors. Although asset prices are unlikeiy to change, the FOI 1876 - Documents - Page14 composition of ownership may change. Trusts, including managed Affected. Not affected. After?tax returns for Australian resident investment trusts The after-tax returns on units in unit investors will fall under the policy. However, trusts will be reduced for Australian prices are unlikely to-be impacted as returns residents: are unchanged for foreign residents, who are . investors will not be able to use likely to be the marginal investors. Although net investment loss on units to asset prices are unlikely to change, the offset saiary and wage income composition of ownership may change. deferring those losses to a later point in time. - CGT discount will also be reduced to 25 per cent. Partnerships and soie Not affected, subject to the non- Not affected. Not affected. traders commercial loss rules Under current rules, partnership and sole trader losses are subject to the non-commercial toss rules, which mean that you can only make use of the losses against wage and salary income in certain circumstances a for example, if you earn less than $250k in salary and have business income of more than $20k. Assuming the non?commerciai loss tests are satisfied, under Labor?s proposal, any partnership losses could be used to offset salary and wage income. General law partnerships are not affected. However, it is possible for FOI 1876 - Documents - Page15 limited partnerships to be affected as they may provide passive income (eg. corporate limited partnerships). Super funds (inciuding Not affected. Not affected. Not affected. As the policy indicates no change to superannuation funds, members would not be affected. Business investments Not affected. Not affected. Not affected. (using the structures outiined above) Labor?s negative gearing policy as originally announced does not explicitly exclude business income. As a result it depends whether or not investment income is interpreted to inctude business income. However, Labor has recently clarified that their negative gearing policy does not affect current ruies on business investment deductions. FOI 1876 - Documents - PageiG 522 We suggest changing ?negative gearing? in the sentence below to ?negatively geared property'. People wouid stiil be able to negatively gear equity investments. And for the mums and dads, nurses, teachers, police, small business owners and other on ordinary incomes who wish to use negative gearing in the future to give themseives a go at building wealth for their retirement, they will have to compete with more wealthy investors for a much smaller pool of housing stock, crowding them out of the opportunity they have right now. We presume "Labor '5 proposal therefore runs the risk that more wealthy investors will continue to enjoy the same tax incentive benefits they get now, while more modest mums and dads will have to look elsewhere.? refers to structuring opportunities, as the Eimit on negative gearing for established property would not differentiate between more or less weaithy investors? 522 S22 1 .1. 876. . .. FOI 1876 - Documents - Page18 522