Late last month, opposition leader Bill Shorten announced that if elected, his Government would reverse the 2.5% company tax reduction for companies turning over between $10 million and $50 million per annum. After an uproar from the business community, the decision was quickly reversed, in the name of providing certainty over an issue that has been anything but in the last couple of years. But that's not the only proposal Labor has in the works.
Last year Labor announced that it would begin taxing distributions to trust beneficiaries at a minimum rate of 30%. That is, the first dollar of any trust distribution would be taxed at 30%, rather than being subject to lower personal rates, including the tax-free threshold. This is a dramatic shift from previous practice, and, despite the rhetoric of targeting the complex tax arrangements of high-wealth individuals, is likely to impact ordinary small-medium business owners the hardest.
Labor then doubled-down on this strategy by declaring earlier this year that it would move to prevent excess imputation credits being refunded to individuals and super funds.
When dividend imputation was first introduced in 1987, franking credits could be used to offset any tax payable, but anything excess to the total tax due was simply lost. In the early 2000s, the Coalition changed the rules so that these excess credits could be refunded. Not only could taxpayers have their tax bill reduced to zero by franking credits, but now if there was anything left over, a refund would be payable.
Whether or not this was prudent, one of the major concerns with this change is that we have lived with the refund system for almost two decades now. Retirement strategies have been planned years in advance, and commenced, based on certain assumptions as to how much a person will need to live on and what income will be available. Franking credit refunds have been factored into these calculations. To make such a dramatic change now potentially undermines the very objective of the superannuation system, which is to ensure that people are confidently self-sufficient in retirement, rather than dependent on Government welfare.
Not long after the announcement, there was an inevitable outcry from the Government about the impact it would have on retirees, and in response the opposition very quickly announced modifications to exempt anyone on a pension or currently receiving income from a Self-Managed Superannuation Fund. Still, this only removes the impact for current retirees. Those close to retirement age could still be affected.
Of course, this is just a proposal for future legislation. Not only is Labor in opposition, but even if, as current polls seem to indicate, it is elected to Government, recent history suggests it may have a difficult time getting any revenue measures unchanged through both houses of Parliament.
Nevertheless, on the issue of small business taxation and superannuation at least, Labor seems determined to provide real differentiation at the next election.