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Reforms to franking credits and the capital gains tax discount are likely to happen this decade, despite their contentious position in the last federal election.
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Franking credits, CGT reforms set to feature this decade
16 March 2020
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10 minute read
Speaking at the Tax Institute’s annual Tax Summit, senior tax counsel Professor Robert Deutsch noted that while Australia was unlikely to see major tax reform in the current political cycle, last year’s federal election had provided an insight into what was to come.
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In particular, the franking credits proposal will likely resurface, but in a manner that will see refunds capped at a certain level.
“The current policy is costing the federal government somewhere in the order of $5 billion a year and the saving they would make is quite substantial if they capped it,” said Professor Deutsch.
“Now that’s something that we can argue about, but if you capped it, for example at $10,000, it will eliminate all those refunds for the fabulously wealthy people such as Dick Smith, who have talked about this in the press, and it would leave pensioners effectively unscathed — and it would leave a lot of other people unscathed as well, because they are entitled to their refunds up to that cap.
“I think the prospect of this happening in the next decade is high, but I do emphasise that I am talking about the next decade, not this current political cycle.”
Professor Deutsch’s comments come after KPMG warned that the franking credit proposal would likely return due to growing strain on the country’s tax base.
Parliamentary Budget Office figures released by Labor ahead of the election showed that its plan would increase revenue by $58.2 billion over the next 10 years.
CGT discount
Professor Deutsch also believes changes to the CGT discount, halving it from 50 per cent to 25 per cent, will also likely happen over the next 10 years.
“This is the 50 per cent discount for individuals which I have always argued is too high, relative to what is happening in the economy, relative to recent historical rates of inflation during the course of the last decade and what is likely to happen during the course of the next decade — although no one has a crystal ball in that regard,” he said.
“The distinction between earned income and capital gains, in terms of how they are taxed, to me, that is just too big a difference and way too generous. I think half of that CGT discount would be entirely appropriate, possibly with some additional concessional mechanism to allow people who have held assets for more than an agreed required period of time.
“It could be something in the order of six or seven years to have that higher rate of discount. It seems to me that some individuals who have held assets for three to four years in times of negligible inflation should not be entitled to a 50 per cent discount.
“But I am sure many of you will disagree. I think the chances of anything happening in that regard in the next decade are reasonably high.”
Labor leader Anthony Albanese had just this year announced that his party would not be taking the same franking credits and CGT discount proposal to the next election but refused to rule out reintroducing reworked policies.
Negative gearing and discretionary trust distributions
On the flipside, Professor Deutsch believes Labor’s plan to restrict negative gearing and introduce a 30 per cent tax on discretionary trust distributions will have little to no chance of succeeding over the next decade.
“[Taxing discretionary trust distributions] was something that was more difficult, clumsy and less likely to succeed than most of the other measures, and I think that remains the case,” said Professor Deutsch.
“We have tried to tinker with discretionary trust for many years, and there has been some reform, but certainly not in the way of simplification or minimising the use of discretionary trusts for income splitting purposes. I think the chances of anything happening in the next decade on this front is low.
“[Restricting negative gearing] was certainly not the low-hanging fruit; I don’t think anyone is going to try to have a go at negative gearing again.”
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