Australian Tax Reform more of a Whimper than a Bang

On the good side, it appears that a lot of the major tax changes that would detrimental to my situation (and should be attractive to a socialist government) ended up not happening (yet - there's always the budget after the next election). Apparently no changes to how capital gains are taxed, negative gearing remains unchanged, and a tax cut for superannuation contributions by low-income workers rather than a flat "concession" for superannuation contributions.

On the bad side, it appears that this "tax reform" isn't as major/significant/revolutionary as Mr Rudd had been intimating for the past couple of years -- there seems to be a definite gap between what Labor promises and what it actually delivers. And from the brief highlights I've read about so far it appears that many of the changes are being "phased in" over such a long time scale that the effects will be minimal for many workers. An example is the headline grabbing "boost" to superannuation SGL rate from 9% of salary to 12% of salary. Even though older workers (who started work well before universal superannuation was implemented) would benefit the most from this change, by not introducing it until 2019 many of these workers will have retired before it comes into effect. Then again, raising the SGL age limit to 75 fits a vision where workers are expected to work well beyond 65 if they are fit and healthy and don't have enough super saved up to retire at 65.

On the plus side, the increase in the contribution cap to $50,000pa for workers aged over 50 with less than $500,000 in super means I will be able to salary sacrifice more into super (though not quite as much as before the last round of superannuation changes were introduced by Labor). The $500 government superannuation contribution for low-income workers (up to $37,000 income apparently) may also be of benefit to DW (working part-time) and DS1 (who earns a few thousand each year from busking and makes superannuation contributions). I won't know for sure until the May budget comes out a week from Tuesday and I can read the fine print.

Probably the worst aspect of this "tax reform" program is that the changes will be introduced over the next decade, and due to political reality (several election campaigns, shifts in the balance of power, and possibly a couple of changes of government) nothing that is currently "planned" will necessarily become reality. In terms of being able to make long term financial plans that are "tax effective", the devil you know is infinitely preferable to the devil you don't know.

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Henry Tax Review and Reform of the Australian Tax System

The long-awaited Henry Tax Review Report will be made public on Sunday. The government has been sitting on the report for a long while, and the release is just in time to feed into this year's pre-election budget. The government has already hinted that this year's budget will cut tax for "most" middle-income "working families", so I'm guessing all the revenue raising possibilities contained within the Henry Report will have been thoroughly examined. It will be interesting to see what the report contains, and which bit the Labor government chooses to adopt -- especially in the near term (I expect any costly or difficult reform will be "phased in" over enough time to leave it as a problem for Mr Rudd's successor). My guesses as to what end up as policy based on the report:
* resource tax - this seems a no-brainer given the high profit margins currently enjoyed by the big miners due to the resource boom
* superannuation changes - I will be pleasantly surprised if Labor doesn't fiddle with the superannuation laws. The most obvious way to get some more revenue from the "rich" will be to eliminate the recently introduced tax-free status for superannuation income during the pension phase. Self-funded retirees are too "rich" for most of them to be Labor voters, so Mr Rudd will be happy to tax them more. The revenue will probably be used to increase the tax benefits of superannuation for low-income workers. Apparently a flat 15% tax on super contributions isn't "fair" as high-income workers get a bigger "benefit" -- conveniently forgetting that the bigger benefit is due to paying a much higher rate of tax in the first place.
* capital gains - I suspect the 50% tax rate "discount" applied to long-term capital gains will be removed or reduced. And I doubt the cost-base indexation it replaced won't be brought back in, unless it is also introduced for savings account interest (ie. only savings account interest above the CPI is taxed). That would fit in with the rumours about making savings for low-income workers more attractive.
* negative gearing - I doubt this will be axed (it had too much impact on housing investment last time changes were attempted under Keating), but it may be "quarantined" ie. Interest costs are only deductible against income (rent) from the same investment type. They already have similar rules relating to different types of capital gains.

I'm sure there will be lots of surprises in the Henry report and the May budget. But I'm not expecting them to be pleasant ones for this middle-income "working family" -- "tax effective" investments are likely to come under serious attack.

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Award Winning Personal Finance Blog!

Enoughwealth.com was included in this list of the 'top 50' personal finance blogs.

Unfortunately from the description of my blog, it seems I was included as a prime example of 'what not to do' ;)

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Net Worth Update: March 2010

Stock portfolio value increased significantly during March, which meant our SMSF account also rose (as our superannuation is largely invested in the stock market via the Vanguard High Growth Index Fund). There were no employer contributions deposited during this month. Our real estate investments also saw a significant rise in valuations compared to the previous month's data, but future monthly NW updates will not include current property value estimates because the domain.com website has been revamped and the monthly median sales price data is no longer available. In future months I'll simply increase valuations by 0.4%, which should be slightly below the long term price trend. I can make adjustments every six months when other data becomes available.

Assets___________$ Amount______$ Diff_____% Diff 
Stocks____________$60,647_____$13,181____27.77 % 
Retirement_______$342,441_____$17,748_____5.47 % 
Home_____________$864,631_____$17,836_____2.11 % 

Debts____________$ Amoount_____$ Diff_____% Diff 
Home Mortgage(s)_$364,555________-$67____-0.02 % 
  
Net Worth________$903,164_____$48,833_____5.72 % 

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