Australian Taxation Law: Labor's Tax Proposals and Voter Rejection

This report analyzes the proposed tax policy changes by the Australian Labor Party, specifically focusing on franking credits and negative gearing. The assignment examines the specifics of these proposed changes, including the limitations on franking credit refunds and adjustments to negative gearing rules. It explores the reasons behind the rejection of these policies by a majority of voters, considering factors such as potential impacts on different taxpayer groups, the principles of a 'good tax' (equity, efficiency, simplicity, certainty, and neutrality), and the government's messaging. The report investigates the implications of the proposed changes on capital gains tax, dividend income, and overall tax liabilities, offering insights into the political and economic considerations that influenced voter sentiment. The analysis includes a discussion of the Labor government's rationale for the changes and the counterarguments presented by various stakeholders, providing a comprehensive understanding of the tax reform debate.

Running head: AUSTRALIAN TAXATION LAW
Australian Taxation Law
Name of the Student:
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Contents
Part 1:...............................................................................................................................................2
Part 2:...............................................................................................................................................5
References:......................................................................................................................................9

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Part 1:
The Labor government has proposed changes to the existing tax policies in Australia to what it
termed as the policy that would affect the super-rich retirees of the country only and will not at
all impact the 92% ordinary tax payers of the country. With Federal election close at the heels
the time is apt to review the proposed changes to the existing taxation policy relating to franking
credit proposed by the Labor government. A detailed discussion on the proposed changes in the
tax policy along with its expected implications on the tax payers in this document will help the
readers to have an independent and objective view on the proposed changes to the taxation
policy (Hansen 2017).
Imputation system of tax allows the Australian companies to transfer the benefit of tax payment
on dividends to the shareholders by attaching franking credits. The shareholders as a result can
use such franking credit to reduce their income tax liability by offsetting the tax liabilities. In
addition the shareholders are also eligible to be refunded of excess franking credit, if any after
offsetting their income tax liabilities ("Labor Sets January 1 Start For CGT And Negative
Gearing Plans" 2019). The proposal introduced by the Labor government proposes to restrict the
use of franking credits by limiting the option of refund of excess franking credits after tax off set.
In fact the office spokesperson of Labor government has described the proposed changes to the
tax policy as a measures to improve the tax system in the country to make it fairer by clumping
down on a concession.
Another changes to the existing taxation policies proposed by the Labor government is the
changes of negative gearing. As per the proposed changes in negative gearing, the tax discounts
on capital gain will be halved and negative gearing for new investment properties will be

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applicable. As per the proposed changes only the new investment properties will qualify for
negative gearing and not the old investment properties. According to the proposed changes in
negative gearing the rental losses suffered by tax payers will be allowed to be deducted from
other income of the tax payers. As per the expectation of the Labor government, this measure
will enhance the revenue of the government by $2.9 billion over 4 years. In fact the Labor
government also expects that the above change in negative gearing will help the government to
generate additional revenue of $35.1 billion over the 10 years period after the implementation of
proposed change in negative gearing (Heeringa and Swank 2019).
However, both the above changes have been rejected by the majority of the voters. The reasons
for the rejection of the two proposed changes of Labor government to the existing taxation
policies on franking credit and negative gearing are explained a bit in this paper to provide an
insightful knowledge on the proposed changes of Labor government.
As per the estimate of the Labor party the refund of excess franking credits to the shareholders
costs Australia approximately $6 billion in revenue each year. The party also outlines that vast
majority of the beneficiaries of this refund are super rich retirees and 92% of the ordinary tax
payers in the country are absolutely unaffected due to the proposed changes in the franking credit
policy. However, in contrary to these claims, Financial Services Council of Australia has
submitted that over 20% of large superannuation funds regulated by the Australian Prudential
Regulation Authority claim franking credit refund. In fact on an average $4.7 million refund per
annum shows that the expected implications of the change in franking credit refund scheme
could be significantly large on super fund industry than explained by the Labor government

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(Carling 2019). Thus, larger proportion of tax payers in Australia are expected to be influenced if
the proposed changes in the franking credit is implemented (Karp 2019).
Considering the significant implications on the large proportion of ordinary tax payers in the
country the majority of the voters have rejected the proposed change in franking credit tax
policy. It is important to note that the Labor government has mentioned that 92% of the ordinary
tax payers in the country will not be influenced due to the proposed change of franking credit tax
policy. Thus, even the Labor government acceded that 8% of the ordinary tax payers will also be
impacted due to the change in the franking credit tax rules. However, in reality the expected
implications of the proposed change in franking credit tax policy is on significantly larger
proportion of ordinary tax payers. Thus, the whole concept that the proposed change by limiting
the refund of excess franking credit will only influence super rich does not hold ground. Hence,
it was no surprise that the majority of the voters rejected the proposed changes in tax policies in
the country proposed by the Labor government (Kovak, Oldenski and Sly 2017).
Further the proposed change in negative gearing that proposes to reduce the capital gain tax
discounts by half after January 1, 2020 has also not been supported by the majority voters for a
simple reason that this will increase the capital gain tax liability of the tax payers. The proposed
change of allowing rental losses from new investment properties acquired on or after January 01,
2020 from other income of tax payers have not attracted the tax payers as the change clearly
points out that the investment property must be new. Thus, the proposed changes in negative
gearing impose excess tax obligations immediately by reducing the capital gain tax discounts by
half of such tax however, the benefit is not immediate as the rental losses can only be deducted
from other income if the rental losses have accrued from new investment properties (Mondal
2016).

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The principles of good tax have following characteristics:
I. Equity.
II. Efficient.
III. Simplicity.
IV. Certainty.
V. Neutrality.
Since the two proposed changes of the Labor government on franking credit and negative
gearing lack neutrality, certainty and simplicity of the Good Tax Principle hence, the majority of
voters have rejected both the proposed changes. Both the changes in franking credit and negative
gearing are expected to impact the ordinary tax payers as well as tax payers in general,
specifically super rich retirees in case of limiting the refund of franking credit hence, it is no
surprise that these proposals have not gone down well with the tax payers in the country
(Murphy and Martin 2019).
Part 2:
As discussed in brief that the Labor government in Australia proposed certain changes in the
existing taxation policies of the country. One those changes in taxation policies include limiting
the refund of excess franking credit granted to the shareholders for the tax benefit transferred by
the Australian companies to the shareholders for the tax paid by the companies on dividend.
Another proposed change in the tax system is on negative gearing that reduces the capital; gain
tax discounts to half and allows the tax payers to deduct rental losses from new properties from
other income (FANE and RICHARDSON 2017).

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It would not incorrect to the proposed changes in taxation policies as reforms. The taxation
reforms that the Labor government wanting to make and take these to the election as their tools
to woo the voters have not worked as the majority of voters rejected both the changes.
Franking credit is the tax benefit that passed on by the Australian companies to the shareholders.
The Australian companies that have paid taxes on dividends transfer the franking credit benefits
to the shareholders to allow them to maximize their income by reducing their income tax
liabilities. The shareholders can use the franking credits transferred by the dividend paying
companies to offset the income tax liabilities. Further in case there is any excess franking credit
left after offsetting the income tax liabilities the shareholders are refunded such excess credit as
per the existing taxation policy on franking credit. However, the Labor government in its
proposed change in the franking credit has decided to limit the refund option allowed to the
shareholders for excess franking credit ("Labor To Limit Negative Gearing Concessions To New
Properties From January 1" 2019). This according to the Labor government costs the Australian
government $6 billion each year in revenue (Egger and Maria Radulescu 2016).
Thus, if the proposed change in franking credit tax policy envisaged by the labor government is
implemented then the shareholders of Australian companies will not be allowed to get refund for
the excess franking credit left after offsetting their respective income tax liabilities. Though the
Labor government claims that 92% of the ordinary tax payers are expected not to be impacted
with the change in the franking credit tax policy however, reports from Federal Council has
expressed a contrary view. As it claims that large proportion of tax payers including ordinary tax
payers are expected to be impacted as a result of limitation on the franking credit refund ("What
Is Negative Gearing And What Are Labor’S Proposed Changes?" 2019).

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Negative gearing change proposed by the labor government implies that the discount on capital
gain tax to be halved along with providing an incentive to the tax payers of deducting rental
losses from new properties from other income of the tax payers. The proposed change if
implemented would result in higher capital gain tax liability to the tax payers for reduction of
discount in capital gain tax. The expected implication however, also include reduction in the
amount of taxable income of tax payers for the option of reduction of rental losses from new
properties (Blunden 2015).
As already mentioned that the voters in most part of the country have not supported the proposed
changes in franking credits and negative gearing. The reasons that the changes were not
welcomed by various areas of the voting public is due to the negative implication on the income
tax liability of these tax payers. Particular groups such as those who have substantial amount of
dividend income including significant proportion of ordinary tax payers felt they would be at
disadvantageous position if the proposed changes are implemented. This is because the expected
income tax to be paid by these groups will be significantly higher subsequent to the
implementation of the franking credit tax change. Similarly, the tax payers with capital gains will
have to pay higher capital gain tax if the changes in negative gearing tax is implemented.
The area of proposed change in limiting the franking credit refund where it deals with declining
the super-rich tax payers from availing refund for abnormally excess franking credit balance has
all the attributes of Good Tax principle (Abo-Zaid 2018).
Firstly, it would be incorrect to suggest that the proposal has been rejected out rightly by all the
voters. However, it is also cannot be denied that majority of voters have rejected the proposed
changes of Labor government in franking credits and negative gearing. The reason for that as

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mentioned earlier is the miscalculation by the Labor government in estimating that 92% of the
ordinary tax payers will not be influenced by these changes. Since, the combined portion of
ordinary tax payers expected to be affected by two different tax proposals is significant hence,
these tax payers rejected the tax proposals in their entirety instead of individual proposals.
as
not talked about a significant proportion if the proposed change in the franking credit is
implemented Expected impact of the changes in franking credit as per
The proposed changes to the

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References:
"Labor Sets January 1 Start For CGT And Negative Gearing Plans". 2019. Australian Financial
Review. https://www.afr.com/politics/federal/labor-sets-january-1-start-for-cgt-and-
negative-gearing-plans-20190328-p518mp.
"Labor To Limit Negative Gearing Concessions To New Properties From January 1". 2019. ABC
News. https://www.abc.net.au/news/2019-03-29/labor-to-end-negative-gearing-concessions-
for-new-investors/10951194.
"Tax Policy Changes You Need To Know Ahead Of The Federal Election". 2019. ABC News.
https://www.abc.net.au/news/2019-03-29/tax-changes-you-need-to-know-ahead-of-the-
federal-election/10945466.
Abo-Zaid, Salem M. 2018. "On Credit Frictions As Labor-Income Taxation". SSRN Electronic
Journal 01 (01): 11-20. doi:10.2139/ssrn.2173592.
Blunden, Hazel. 2015. "Discourses Around Negative Gearing Of Investment Properties In
Australia". Housing Studies 31 (3): 340-357. doi:10.1080/02673037.2015.1080820.
Carling, Robert. 2019. "A Form Guide To Labor’S Bold Tax Plans - And Why They're Too
Bold". The Sydney Morning Herald. https://www.smh.com.au/federal-election-2019/a-form-
guide-to-labor-s-bold-tax-plans-and-why-they-re-too-bold-20190516-p51o2d.html.
Egger, Peter, and Doina Maria Radulescu. 2016. "Labor Taxation And Foreign Direct
Investment*". Scandinavian Journal Of Economics 2 (2): 18-33. doi:10.1111/j.1467-
9442.2011.01653.x.

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FANE, GEORGE, and MARTIN RICHARDSON. 2017. "Negative Gearing And The Taxation
Of Capital Gains In Australia*". Economic Record 88 (255): 249-261. doi:10.1111/j.1475-
4932.2005.00259.x.
Hansen, Emanuel. 2017. "Optimal Income Taxation With Labor Supply Responses At Two
Margins: When Is An Earned Income Tax Credit Optimal?". SSRN Electronic Journal 1 (1):
21-2. doi:10.2139/ssrn.2972116.
Heeringa, Willem L., and Job Swank. 2019. "Heterogeneous Consumers, Credit Rationing, And
Tax-Benefit Policies". De Economist 167 (2): 105-126. doi:10.1007/s10645-019-09337-x.
Karp, Paul. 2019. "Labor Pledges To Overhaul Negative Gearing By 1 January 2020". The
Guardian. https://www.theguardian.com/australia-news/2019/mar/29/labor-pledges-to-
overhaul-negative-gearing-by-1-january-2020.
Kovak, Brian, LIndsay Oldenski, and Nicholas Sly. 2017. "The Labor Market Effects Of
Offshoring By U.S. Multinational Firms: Evidence From Changes In Global Tax
Policies". The Federal Reserve Bank Of Kansas City Research Working Papers 1 (1): 10-30.
doi:10.18651/rwp2017-12.
Mondal, Sunita. 2016. "The Labor Market Effects Of State And Local Expansions Of The
Earned Income Tax Credit". SSRN Electronic Journal 1 (1): 80-85.
doi:10.2139/ssrn.2837162.
Murphy, Katharine, and Sarah Martin. 2019. "Labor's Tax Policies 'Highly Progressive' With
Top 20% Feeling Most Impact". The Guardian. https://www.theguardian.com/australia-
news/2019/may/13/labors-tax-policies-to-have-virtually-no-impact-on-wealth-of-bottom-50-
of-households.

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"What Is Negative Gearing And What Are Labor’S Proposed Changes?". 2019. Domain.
https://www.domain.com.au/advice/what-is-negative-gearing-and-what-are-labors-
proposed-changes-797586/.

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