More instability for superannuation

The superannuation industry is used to changes driven by short term political tactics, so Labor’s proposed changes to dividend imputation credits should not be a surprise.  We have now had 35 years of annual changes to superannuation, many of them structured around short-term fiscal issues, and few around building a cohesive national retirement incomes plan.

Long-term planning appears to be difficult.  The Financial System Inquiry in its final report of December 2014 set a proposed primary objective of superannuation “to provide income in retirement to substitute or supplement the Age Pension”.  More than three years later, this simple objective is still stuck in the Senate and the relationship between superannuation, social security and taxation remains fluid.  Uncertainty about the future and growing cynicism towards all political parties mean that much of the population is sceptical about superannuation despite its incredible value for almost all Australians.

Sadly, the brand Superannuation is tarnished by continued poor publicity from media reports, fuelled by an array of analysis largely from ill-informed commentators.  Consequently, there is national ignorance and apathy.

As we have noted frequently, one of the prime drivers of superannuation value has been the 5% return provided above inflation for 25 years or more by MySuper products and their predecessors, Balanced Funds.  The emphasis on growth assets has also led to significant investment in Australian shares, including by the SMSF sector.

Many SMSFs invest in Australian shares to obtain this equity risk premium and members have done very well from a combination of capital growth, dividends and franking credits.  Many strategies have been built around living off the income (including franking credits) and preserving the capital until later in retirement.  This strategy has been far more effective than buying annuities or shifting into lower value lifecycle products.  However, Labor’s proposed new tax on SMSFs will require a shift in investment strategies.

Many SMSF retirees do not qualify for the Age Pension until later in retirement, if at all.  Thus, they help to keep the costs of our welfare system low.  Conversely, those couples who do not (or cannot) save for retirement, cost the taxpayer more than $800,000 over their retirement years (in today’s dollars).

Labor’s new tax grab

Labor’s proposal to remove tax credits for low tax-payers had some unintended consequences and it has now eliminated the Future Fund and all people on welfare, including Age Pensioners.  This is better targeted as it still attacks those retirees who have large Australian share portfolios either in their own name or in their SMSF.  However, it is still extraordinarily bad policy for six reasons:

• It is product-specific, attacking SMSFs but no other types of superannuation funds.
• Additional revenue figures have been bandied around based on out-of-date data, which does not take into account the major tax changes which took effect from 1 July 2017 and mean that retirees with larger balances (broadly those with over $1.6 million in super) already face reduced franking credit refunds or an increase in their tax bill.
• It is easily avoided by a change in asset-allocation, or by partial or full transfer into an APRA fund, so it will not deliver much of the tax claimed.
• It signals that retirees should shift away from Australian shares to less appropriate assets, weakening our domestic capital market (SMSFs hold more than 12% of listed Australian shares).
• It will lead to some SMSF retirees earning less and moving to a part Age Pension earlier.
• It further weakens confidence in the stability of Government policy towards superannuation – even those not directly affected may experience reduced confidence that saving extra for retirement will be rewarded.

We expect that other forms of growth assets such as infrastructure trusts, REITS and syndicated property will become more popular and more overseas listed shares will be bought in place of Australian companies.

This proposed change comes on top of the 2016 Budget changes which curbed the concessions for higher earners.  We accept that there are still many members of SMSFs with very large balances (which Labor ignored when it did its comprehensive review of superannuation).  If it is deemed that they need to pay more tax, there is a relatively simple solution.  Simply have a limit on the total amount allowed to be held in superannuation at retirement.  At (say) age 65, limit an individual to (say) $3.2 million in total pension and accumulation and make them withdraw the excess (tax-free).  Then, returns on the assets will be taxed in their personal return like any other investment.