Surviving Gst: Cutting Through The Red Tape

Newcastle Herald

Tuesday June 20, 2000

The Age

TAX reform and its prodigious offspring, the Goods and Services Tax, will be here in just ... days.

Whether we are buying or selling goods and services, trading shares or investing in property, our lives will change after June 30.

But to what degree? And how can we structure our financial affairs to minimise the strain and maximise gain?

The GST is the highest-profile component of the new tax system.

Sales taxes of between 12% and 45% currently levied on a range of items will be abolished and a 10% GST imposed.

Most items that are presently exempt from sales tax but will have GST applied will go up in price ? everything from clothes to services such as plumbers, hairdressers and electricity.

Items with 22% or higher sales tax are expected to decrease in price with GST applied, but the post-GST price of items with 12% sales tax is less certain and will depend on mark-up levels.

And the extent of any post-GST price rise will not be an arbitrary case of taking away the sales tax and adding the 10% GST, because sales tax is added at the wholesale level, whereas GST is added at point-of-sale.

To offset the impact of price increases, the Government has instituted across-the-board income tax cuts and a variety of social security benefits, including pensions increasing by 4%, and income testing for family benefits to start at $28,200; $4400 more than now.

So what do these changes mean for our hip pocket?

Taxpayers Australia national director Peter McDonald says the answer will depend on our consumption habits.

`Obviously, the less you consume, the better off you are,' he said. `Conversely, the more you consume, the worse off you may be. And it depends on what you consume.

`For example, if my weekly food requirements cost me $100 today and I spend it on fresh food, (which is GST-free) I'll be better off than someone who buys the equivalent amount of take-away food (that incurs GST), which will cost them anything up to 10% more.'

Mr McDonald says most Australians should have more money in their pockets from tax cuts and pension rises.

But he adds some of this has already been clawed back through interest rate rises, of which there are more on the horizon.

Losers in the new tax system could be low-income earners who don't pay income tax (and therefore miss out on tax cuts), don't qualify for social security assistance and also face the GST hikes on goods and services they buy.

Self-funded retirees will face these higher prices plus lower tax cuts, and, once they pass $30,000 annual income, won't qualify for the Government's one-off savings bonus of up to $3000 for retirees.

Tax reform will affect the spectrum of financial affairs, changing how we consume, spend and generate wealth.

CPA Australia financial planning consultant Brad Pragnell says this impact will derive partly from the GST's relation to the economy and partly from direct influence of the reforms on the individual.

The economists' consensus is that the GST will add 3% to the annual inflation rate in the September quarter, which could push the CPI to 6.75%.

Mr Pragnell says that, while the long-term inflationary impact of the GST's introduction has been hotly debated, pressure for wage rises could also continue to drive up inflation.

In recent years, the low inflation/high growth environment has strongly favoured equity investments over property and fixed interest, Mr Pragnell says. And an extended period of higher inflation, post-GST, could signal a turning away from equities and back into traditional and far safer `bricks and mortar' investments.

To ensure investors make the most of tax reform changes after June 30, industry specialists are urging investors to take a good look at how their portfolios are structured.

Raylene Benson, a certified financial planner with Retireinvest, advises investors to consider rebalancing their portfolios away from income-based investments, such as term deposits ? where returns attract the full marginal tax rate ? into growth-based investments, such as shares or property, which you can draw on for required income.

This is because, after June 30, capital gains tax will be slashed by 50% for those holding an investment for more than 12 months.

`Ultimately, our goal is to have our money keep up with inflation so that it retains value over time,' Ms Benson said.

`The way of achieving that is by having growth in your investment. The favourable treatment of capital gains tax makes gearing into growth investment more attractive.'

Below is a sector-by-sector guide to the effects of tax reform on savings and investment and strategies to take advantage of them.

Investment property

GST applies to the purchase of new houses and investment buyers aren't entitled to the Government's $7000 first-home buyer's rebate, which applies to owner-occupiers.

GST doesn't apply to the purchase of an existing residential rental property, but prices are expected to rise as a flow-on effect from new-home prices rises.

There will be no GST on mortgage repayments or housing loan interest. However, landlords must pay GST on goods and services linked to the property, such as repairs, agent's fees and furniture.

Ms Benson says these costs will `ideally' be passed on to tenants via increased rents, but landlords locked into long leases may not be able to do so for some time.

Shares

There is no GST on the buying or selling of shares, but GST is imposed on brokerage.

Mr Pragnell says CGT changes will favour investors turning to growth shares, such as new-economy stocks, as opposed to income-generating shares, such as old economy (mining or manufacturing) stocks that pay better dividends. But Ms Benson warns that technology stocks are very volatile and this may not be an appropriate investment vehicle unless you have time to ascertain long-term capital growth.

Ms Benson says one expected advantage from tax reform (in pending legislation) is that, from July, if you have excess tax credits from dividend imputation, they will be refunded to you, rather than forfeited, as they had been previously.

This is expected to particularly benefit low-income earners, because, previously, if they weren't paying tax, they didn't get this excess franking credit refund.

Allocated pension funds will also benefit. They are now tax-exempt and, therefore, forfeit 100% of tax credits. Under the proposed changes, 100% of these credits will be returned to the fund. This would also apply to indirect share investment in managed funds.

Some commentators say GST-sensitive stockmarket sectors, such as retailing, should be approached with caution after July 1, but Ms Benson says reweighting your share portfolio would be a knee-jerk reaction.

`Once they adjust to both the increased pay packet and the 10% GST, I would suggest that consumers will continue to consume. I don't think there will be a long-term disadvantage to retail outlets.'

Managed funds

A Macquarie Bank executive director, Tim Farrelly, says that, under the new regime, capital gains from managed fund returns will be taxed at around half the rate they previously were, which is a major bonus.

He says those with high returns will most welcome the new system. For example, under the old system, inflation was 3% and, if you made a capital gain of 3%, there would be no tax to pay, while, under the new system, you will pay CGT on half the return (1.5%).

If your capital gain was 20%, under the old regime, on selling the asset you would have to pay tax on 17% of your gain (20% gain minus the 3% inflation). Under the new system, if you make a 20% capital gain, you have to pay tax on half of that, or 10%, and inflation doesn't come into it.

Bank accounts

Customers won't be charged GST directly, but banks will be charged GST on all their inputs and will be able to claim back only certain credits, so they will probably pass on some of these extra costs to consumers, leading to higher bank fees.

However, the Government will abolish the Financial Institutions Duty tax (from July 2001) and Bank Debits Tax, known as BAD, (from July 2005).

Fixed-interest investments

Mr McDonald says that, with inflation expected to rise as a result of the GST, fixed interest investors locked into long-term deposits will be worse off, because they will miss out on the resulting higher interest rates, as they are not growth assets and investors won't benefit from CGT cuts.

Trusts

Planning for investments in trusts will change for the worse for family trusts, which will start to be taxed like companies from July 1, 2001.

Ms Benson says, at present, gains can be passed to individual beneficiaries on a lower marginal tax rate.

From July 2001, gains will be fully assessable at the company tax rate, which means they won't attract CGT concessions available to other structures, such as superannuation funds.

Superannuation

Mr Pragnell says the flat 15% tax on contributions will stay. And the super surcharge for high-income earners (those earning at and above $81,493) of up to 15% on top of that will be retained.

But the post-July 1 decrease in marginal tax rates will make salary sacrificing into super for middle-income Australians less attractive.

For example, under the old system, those with a taxable income of between $38,001 and $50,000 paid 43% income tax, compared to the 15% tax on super contributions.

But, under the new tax system, those with taxable income of between $20,001 and $50,000 pay 30% income tax, compared to the super contributions tax remaining at 15%, eroding the tax-minimisation attractiveness of super.

But Ms Benson says salary sacrifice into super `is still considered one of the most superior tax saving strategies for the long term'.

Self-managed super fund beneficiaries will benefit from a reduced capital gains tax ? down from 15% to 10%.

Those with self-managed funds who are considering starting an allocated pension should note that there is a bill before parliament seeking to tax unrealised capital gains when the self-managed fund converts to an allocated pension fund.

It is scheduled to come into effect on July 1 this year ? although there is considerable opposition from accountancy and retiree bodies. Ms Benson says there is a `window of opportunity' for super members eligible to start an allocated pension to do so before the end of this financial year to maintain the capital gains tax exemption before the changes come into effect.

Insurance

All premiums other than life and health will attract a 10% GST ? a fact that has already been allowed for in the component of current policies that extend past June 30.

But the cost of replacing or repairing homes, goods or cars could rise by up to 10% post-GST, leaving many customers under-insured, and consumers would do well to review their policies.

The fact that some items will fall in price from sales tax abolition will benefit consumers in the context of insurance valuation.

Financial services

While there will not be a GST imposed on basic financial transactions and products such as bank accounts, going to an accountant, financial adviser, stockbroker or lawyer will be more expensive because the GST will be added.

Key dates

July 1
? GST begins
? New lower income taxes come into effect
? Wholesale sales tax ceases
? Luxury car tax begins
? Wine Equalisation Tax begins
? State bed taxes abolished
? Diesel fuel rebate scheme expanded and new diesel fuel grant scheme for some
off-road transport begins
? Pay As You Earn system, prescribed payments system, provisional tax and
company tax instalments replaced by Pay As You Go
? Valuation of partially completed constructions required
? Stores required to display GST-inclusive price tags

August 21
? Lodgment deadline for first monthly GST return, the Business Activity
Statement

October 21
? Lodgment deadline for first quarterly Business Activity Statement

January 21, 2001
? Last day to claim Wholesale Sales Tax credit for stock held at June 30

July 1, 2001
? Financial Institutions Duty to be abolished
? Businesses allowed to claim 50 % of input tax credits for purchase of new
motor vehicles

July 1, 2002
? Businesses allowed to claim full input tax credits for the purchase of new
motor vehicles
? Energy Grant Credit scheme replaces diesel fuel rebate and grant schemes

July 1, 2005
? All supplies made under
a contrct dated before December 2, 1998 now
subject to GST
? Debits tax to be abolished

© 2000 Newcastle Herald

Back to News Index | Back to Home