Many people need more clarity on how the new tax rules will affect them

Source: The Australian

The federal budget derailed traditional tax planning and wealth accumulation strategies in place for generations, and yet months after it stunned the nation, so much detail remains unanswered, leaving too many people in limbo over their future finances.

Key changes have been legislated, including restrictions on negative gearing, overhauling capital gains tax and cracking down on superannuation lending. And even then, we’re now getting a second wave of legislation as the government attempts to iron out unintended consequences that continue to emerge for its tax changes.

But proposed changes to discretionary trust taxes are yet to reach parliament. Small-business owners and investors are in a holding pattern until finalisation of the rest of the rules, which have already undergone change after enormous backlash to what amounted to a death tax — a proposed 30 per cent minimum tax on testamentary trust distributions.

Unfortunately, confusion reigns supreme and many people, including seasoned financial advisers and accountants, are unclear how the raft of new rules will operate in practice.

Questions for Chalmers

Why do taxpayers need to spend millions of dollars in total on valuations?

When the inflation indexation method for CGT begins in July 1, 2027, the legislation states that there are two methods the owners of the roughly five million investment property and business assets at this important crossover date. 

The first is to use a valuation as at July 1, 2027, or do one retrospectively when the property was subsequently sold down the track. 

However, the preference is to get a formal valuation on July 1, 2027, as the ATO has more power to reject a retrospective valuation done years after July 1, 2027. 

But trying to do the right thing and get a valuation as at July 1, 2027 may prove a challenge given there are fewer than 10,000 registered valuers and nobody, including Treasury, has published how many assets will need valuing, though estimates suggest it could exceed five million business, trust and property assets. 

The second valuation method available will be to use the apportionment method, which was outlined in the draft "tranche 2" legislation late on Tuesday. 

This method divides an overall capital gain (or capital loss) between:

• The ownership period prior to July 1, 2027, which continues to benefit from the existing 50 per cent CGT discount if applicable; and
• The ownership period from July 1, 2027, where capital gains are taxed after allowing for inflation through CPI indexation. 

The apportioning method estimates the CGT asset's value as at the end of June 30, 2027, by assuming the CGT asset grew at a compounding daily growth rate (or declined in value at a negative daily compounding rate) over the entire ownership period. The capital proceeds onto he deemed sale at the end of June 30, 2027 are determined using this growth rate. 

The problem with the apportionment method is for assets to grow faster before July 1, 2027 and slower after July 1, 2027. The estimated value as of July 1, 2027 would be understated and result in more of the gain being taxed under the less generous indexation method. 

In other words, since we cannot predict whether an asset's growth rate after July 1, 2027 will differ from its growth rate before that date, the safest approach is to still pay for a July 1, 2027 valuation.