Category: Newspaper/Blog Articles/Hansard

IPA Review

7 December 2016

Brett Hogan – Director of research at the Institute of Public Affairs

The bipartisan attack on our superannuation system puts Australians’ retirement savings at risk, writes Brett Hogan.

On 3 May 2016, in his first budget as Treasurer, Scott Morrison took the nation by surprise when he announced significant changes to the taxation and regulatory treatment of superannuation.

Now both the Coalition and the Labor Party are treating superannuation as just another pot of money to dip into for government revenue, undermining the integrity and viability of the retirement income system.

Policymakers have been at pains to emphasise terms such as ‘fairness’ to explain their proposed superannuation changes. But two numbers explain what the superannuation debate is really about.

The first number is $502 billion. According to its own budget papers, in 2019-20—less than three years from now—Australian Government spending (not including states and territories) will reach half a trillion dollars per year. In comparison, government spending in the last year of the Howard Government (2007-08) was $271 billion.

The second number is $500 billion. Sometime after 30 June 2017, Australian Government gross debt is expected to pass $500 billion for the first time. Gross debt on 30 June 2007 was only $53.2 billion.

Contrary to claims about equity, fairness and the need to tackle so- called ‘tax concessions’, it is out-of- control government spending that is driving these superannuation changes and ongoing efforts to increase the government’s tax take.

In April 2015, the ALP announced its new ‘Fairer Super’ policy, in which it promised to levy a new 15 per cent tax on superannuation pension earnings of over $75,000 per year, and also reduce the income threshold for the 30 per cent contributions tax, introduced by the Gillard Government in 2012, from $300,000 per year to $250,000.

Unsurprisingly, its policy was couched in the context of needing to limit so-called superannuation ‘tax concessions’ claimed by higher income earners, with no acknowledgement that the top three pay 27 per cent of all net income tax or that the top nine per cent of income earners pay 47 per cent.

In response, then Prime Minister Tony Abbott said: ‘Unlike Labor, we have no plans to increase taxes on superannuation and will honour our commitment not to make any adverse or unexpected changes to superannuation during this term.’

Seven months later, Scott Morrison also observed at the Association of Superannuation Funds of Australia Conference that ‘above all else, however, we must remember superannuation belongs to those who have earned it over their working life. It is not my money, nor the Government’s money. It is your money’. Nevertheless, on Budget night, the government announced a raft of changes including a limit of $1.6 million on the value of assets that could be transferred into superannuation pension accounts, the imposition of a new $500,000 lifetime cap on post-tax contributions backdated to 2007 and a reduction of the annual cap on pre- tax superannuation contributions to $25,000 per year.

On 15 September, after fierce community opposition, the government announced that it would replace the proposed $500,000 lifetime cap on post- tax contributions with an annual $100,000 limit.

Morrison also issued a statement on budget night saying that the government would establish a new objective that the role of the superannuation system was merely to ‘provide income in retirement to substitute or supplement the age pension’.

A CONTEST OF DEFINITIONS

The primary objective of the superannuation system should be to ensure that as many Australians as possible take personal responsibility to save for their own retirement and reduce dependence on the age pension. Private funds put aside for retirement represent deferred consumption, so flat and low superannuation taxes on contributions and earnings for everyone is actually good public policy.

However it is increasingly clear in this debate that the actions of policy makers too often do not match the rhetoric.

In his budget speech, after noting that ‘becoming financially independent in retirement, free of welfare support, is one of life’s great challenges and achievements’, Morrison then went on to detail the Government’s changes to reduce ‘access to generous superannuation tax concessions’.

He also justified the new transfer balance cap by claiming that ‘a balance of $1.6 million can support an income stream in retirement around four times the level of the single age pension’. Both of these concepts are flawed.

We made a very clear commitment prior to the last election that there would be no adverse changes in superannuation… we aren’t ever going to increase the taxes on super, we aren’t ever going to increase the restrictions on super because super belongs to the people.

—Tony Abbott, 1 July 2015

The Coalition makes this pledge: We will not make any unexpected detrimental changes to superannuation.

We will deliver greater stability and certainty on superannuation—we won’t move the goalposts.

—The Coalition’s Policy for Superannuation,

September 2013

Every January, Treasury publishes a ‘Tax Expenditures Statement’, an Orwellian term for a document that tallies up all of the extra money it believes it should be getting by way of higher taxes or abolishing rebates or deductions, allowing it and other big government advocates to promote the concept of ‘tax concessions’.

So for instance, Treasury costs the exemption of the sale of a family home from capital gains tax and fresh food from the GST as $25 billion and $7 billion annual ‘concessions’.

It is in this context that Treasury’s characterisation of the 15 per cent tax rate on employer superannuation contributions and superannuation fund earnings as $16.2 billion and $13.5 billion ‘concessions’ gains currency in the public domain.

A tax that is not as high as Treasury would like it to be, or that doesn’t exist in the first place, is not a concession—it is a low or non- existent tax whose absence probably serves another purpose.

Similarly, the Treasurer’s justification that a $1.6 million superannuation account balance is acceptable because it will earn an individual four times the Age Pension in interest is wrong in scope and practice.

It is almost a carbon copy of Labor’s own proposal, and uses the age pension as a retirement income reference point, rather than a fallback welfare payment.

The reference to a $1.6 million superannuation balance delivering annual income equal to four times the age pension implies that it would pay $80,000 per year or deliver an investment return of five per cent.

That is completely unrealistic in an environment where the ten-year Australian Government bond yields are currently hovering around two per cent.

The chair of the Rudd Government’s superannuation review, Jeremy Cooper, also pointed out in early 2015 that the age pension of $1297 a fortnight (including supplements) for a couple would cost $1,022,000 to buy, if it were a product that could be purchased.

The age pension is an inappropriate benchmark of adequate retirement income. A social safety net should not be held out as an ideal goal for individuals in a private market.

THE TREND IS NOT OUR FRIEND

It is difficult to believe that it was only four years ago that all superannuation contributions and earnings, regardless of a person’s income, were taxed at a flat 15 per cent with earnings in retirement tax free.

It was accepted conventional wisdom that while this flat tax was levied on our super contributions and earnings, once we reached retirement age the hand of government would be removed from our pockets forever with people finally allowed to enjoy the fruits of their life’s work tax free. But how quickly things have changed.

The precedent of the doubling of the contributions tax from 15 per cent to 30 per cent by the Gillard Government in 2012 for people earning over $300,000 per year was used by Labor last year to promise to further reduce this threshold to $250,000.

In April, the Turnbull government publicly floated bringing this threshold down to $180,000, but in the Budget confirmed that support for the $250,000 threshold is now bipartisan. Unsurprisingly, in late August 2016 the Labor opposition announced it now supported bringing this threshold down to $200,000.

The more taxpayers that can be captured by the 30 per cent rate the better for government revenue. How long before the $180,000 threshold is tested again and why stop there, given that the Private Health Insurance Rebate, for example, cuts out at $140,000 or Family Tax Benefit Part B cuts out at $100,000?

The amount of extra money you can add to your superannuation account is also under siege, with allowable pre-tax amounts cut from $30,000 and $35,000 per year to $25,000 per year and the post-tax limit of $180,000 per year to be cut to $100,000.

The proposed new ‘substitute and supplement’ objective has already led one prominent body to declare that so-called ‘tax breaks should only be available when they serve this policy aim’.

Most worrying is that for the first time, both major parties now see income in retirement as fair game, with Labor and the government intending to tax income from assets worth over $1.5 million and $1.6 million respectively at 15 per cent.

It is hard to know which is more concerning—the justification of private retirement incomes with reference to the age pension, the optimistic presumption of five per cent investment income returns, or the new revelation that both the government and opposition are now in the business of telling people how much income they should enjoy in retirement.

It is clear that as governments continue to struggle to find the money to pay for their own promises, superannuation tax rates will continue to go up and the applicable thresholds will continue to come down.

THESE CHANGES WILL CONDEMN MORE MIDDLE-INCOME AUSTRALIANS TO THE AGE PENSION IN COMING DECADES.

A POOL OF MONEY JUST WAITING TO BE TAXED

Both major parties now consider Australia’s $2 trillion superannuation pool primarily as a source of additional taxation revenue as well as another means of pursuing redistributive social policy.

Given that the 2014 National Commission of Audit found that 80 per cent of Australian retirees were on the full or part age pension, and that this overall figure will remain unchanged over the next three decades, it is alarming that Labor and the Coalition appear to be on a unity ticket to implement policies to discourage savings, making this situation worse.

These changes will condemn more middle-income Australians to the age pension in coming decades.

Rather than supplementing or substituting the pension, the objective of the superannuation system should be to encourage independence and allow people in retirement to achieve an income of 70-80 per cent of their pre- retirement incomes, a widely accepted benchmark throughout the developed world.

The question shouldn’t be how the superannuation system can better support government spending, or more stringently punish those who seek to take care of themselves.

It should be about how our society can encourage more people to take responsibility for their own lives, maximise every Australian’s retirement income and reduce the cost of welfare.

While the Government’s September announcement that it wouldn’t proceed with its $500,000 lifetime post-tax contributions cap was welcome, limits on what can be transferred into a retirement account remain, as do the tax increases and the proposed objective that superannuation exists only to ‘substitute or supplement the Age Pension’.

How do middle-income individuals, with university, child rearing and mortgage costs, also save enough money to fund their own retirement? How do these changes help a woman who has spent years out of the workforce but in the second half of her career is finally earning a higher income, yet now faces limits on what she can transfer into her superannuation account, and a 30 per cent tax on her contributions?

Every government tax increase— whether on contributions, earnings or income—limits money transferred into superannuation accounts, takes money out of the system, reduces retirement balances and sends a message to everyone that their investments may be safer elsewhere.

Taking an extra dollar out of one person’s account in tax does not mean an equivalent dollar is added to someone else’s savings. It just goes into the Government’s pocket.

This bipartisan approach to superannuation policy will permanently damage trust and confidence in the superannuation system.

The Australian

5 December 2016

Tony Negline

This week the news finally broke on the serious flaws in our compulsory superannuation system: Even the treasurer Scott Morrison appeared genuinely alarmed that more than 2 million workers have been underpaid compulsory super entitlements.

Industry research revealed that nearly one-third of workers are affected by the underpaying of what are supposed to “compulsory” super contributions of 9.5 per cent superannuation. I believe that as the compulsory dimension of the super system is examined more closely in the months ahead it will become clear the system needs some serious adjustments to make it more effective for all concerned.

Under current rules if you earn more than $450 in any month, then your employer must contribute 9.5 per cent of your ordinary time earnings into a super fund. This rate is slowly increasing to 12 per cent over the next decade.

For years, the super industry has been arguing that the $450 threshold should be abolished so that all employees should be getting some super. Is this the right policy?

The reality is that these compulsory employer super payments are forgone wages because employers have a total employment cost for their employees and it is this expense that an employer will focus on meeting.

From an employer’s perspective, it doesn’t matter what is included in this total cost. Typically it will include pre-tax salary, employer provided fringe benefits, workers compensation premiums and super contributions.

Sometimes other costs such as office costs per employee and other internal business costs will also be included. If employees are to get more employer super contributions then other direct employee costs will be reduced.

Employer super isn’t concessionally taxed for the lower paid. Instead employer super contributions are taxed at 15 per cent, but most lower- income earners pay a much lower tax rate than this on their personal income because of our progressive tax scales on that income and the various tax offsets that are available, such as child care subsidies and family tax benefits. To solve part of this higher super fund tax problem, the previous ALP government introduced the Low Income Super Contribution that returned up to $500 of contributions tax if your total income is less than $37,000.

The Abbott government removed this policy, but the Turnbull government has reintroduced it with a new name — the Low Income Super Tax Offset. This compensation covers their contributions tax but not the 15 per cent tax paid super fund earnings before retirement.

Is there a better way?

Here’s the issue for investors and workers.

The maximum age pension for singles is just over $23,000 and about

$34,400 for a couple, assuming maximum pension and energy supplements.

The age pension is a guaranteed income benefit to eligible recipients, especially for those on low or modest incomes. That is, we force low- income employees to save for retirement, but then provide them with a retirement income benefit that may represent a significant percentage of their pre-retiree earnings.

Super was primarily designed to assist people earning between one and 2.5 times average earnings — that is, between $75,000 and 187,000 salary per year. It is people in the income bracket who, with good incentives, could save enough to be off the aged pension for a reasonable portion of their retirement years.

So maybe we should consider changing the compulsory super system so that those earning less than average weekly earnings can make a choice.

They could take the 9.5 per cent as additional salary and pay their marginal rate on that income or they could continue to direct it into super. Those who expect to have a lower income for a temporary time, for example because they are starting their working life, might elect to receive super.

It has been said that most people would then elect not to save for their retirement and would take the higher wage. I suspect this is probably right.

Tony Negline is author of The Essential SMSF Guide 2016/17 published by Thomson Reuters.

Australian Financial Review

5 December 2016

Bryan Ashenden

With the superannuation announcement from budget night now having been passed into law by Parliament, many people may be thinking, what’s next?

But thinking like that could mean you miss the real opportunity. Rather than being faced with uncertainty, right now you actually have a period of certainty. You have just under seven months to prepare and take action with the knowledge about how super will operate into the future.

It’s important to break the changes down to those that require action now, and those that don’t require action until July 1, 2017.

As a starting point, focus on those matters that have an impact this financial year. Take the new rules about non-concessional (or after-tax) contributions as an example. They don’t apply until July 1, 2017. It’s important to be aware how the non-concessional contribution rules will apply from the middle of next year, but there isn’t a lot you can do about them at this point. Instead, your focus should be on what you can do now.

The existing contribution rules that have applied for almost the past 10 years (ignoring the changes to the limits) still apply this year. Depending on your contribution history, this means you could potentially contribute up to $540,000 this financial year. There are rules that need to be met to contribute up to this level, but what’s important is that if you do qualify and are able to make this sort of contribution, you need to do it before July 1.

Of course, not everyone has a lazy $540,000 lying around to contribute to super, but if you have a self- managed super fund (SMSF), you also need to remember what some of your other options are. In addition to cash contributions, you can make in-specie asset contributions.

This simply means that you can transfer certain assets from your own name into that of your SMSF. Shares and managed funds are among the most commonly transferred assets, but if you owned a commercial property in your own name, such as one you use in your own business, then you could consider transferring it (or a share of it) to your SMSF.

It’s important to remember that the super rules work on an individual basis, so a couple could potentially transfer a $1 million property to their SMSF if they meet all the right conditions.

The other significant change to super that has many people concerned is the $1.6 million limitation that will apply from July for super pensions. Again, remember that this limit is per person, so if you are in an SMSF with more than $1.6 million total balance, you don’t need to be concerned – it’s a question of how much each member has.

This leads to another common misconception – there is no limit to how much you can have in super. There are contributions limitations, and there is now a limit on how much can be transferred to a super retirement pension, but there is no limit on how much you can have in super.

If you are lucky enough to have or potentially get to a position of having more than $1.6 million in super yourself, all these new rules say is that the excess needs to stay in the so-called accumulation phase. It can’t be transferred to a pension account. Being in an accumulation account, it will be subject to the standard 15 per cent tax rate in super, but that’s really the only impact.

Of course, it would be good if things were as “simple” as that, but there are a number of other considerations. If you have a transition to retirement pension, or you have more than $1.6 million in a pension, there is an ability to reset the cost bases of underlying assets in your SMSF to their market value, and essentially reduce (or eliminate) current unrealised gains.

While there are certain steps to take to do this, including deciding when, notification about the resetting of the cost base must accompany the 2016-17 tax return for your SMSF. It’s important to ensure the tax agent to your fund is aware of this so it is done right.

It is understandable that many people feel that super rules may be uncertain as they have changed over time. But I think it’s important to consider the following.

There is no guarantee that the super rules won’t change again at some point in the future, but it feels like we may have a couple of years ahead of us without substantive changes. If you still think that super is uncertain, then perhaps it’s important to go back to the fundamentals.

The purpose of super is about providing a mechanism for people to save towards their own retirement. Super always has been, and I suspect always will be, a concessionally taxed environment to encourage this. There is nothing on the horizon that can take away from the certainty that a well-planned approach to super can help Australians towards a more comfortable retirement.

Australian Financial Review

4 December 2016

Joanna Mather

New research suggests the underpayment of superannuation entitlements reached $4.6 billion in 2013-14, a figure that includes $1 billion lost to employees who use salary sacrifice arrangements to try to boost their retirement savings.

Unscrupulous employers, sham contracting and the cash economy were responsible for the underpayment of $3.6 billion, said an Industry Super

Australia report based on Tax Office data.

The problem is compounded by a “loophole” that allows employers to pay less super into the accounts of employees who make voluntary contributions using salary sacrifice, the report said.

If somebody chooses to salary sacrifice $1000 a month, for example, an employer can, in the absence of a contract stipulating otherwise, reduce their contribution by the same amount.

The employer saves $1000 but the employee is no better off in retirement.

The report says $1 billion of salary sacrificed money was used by employers to meet their minimum obligations in this way in 2013-14.

ISA, which represents union-aligned funds, is calling for an end to the salary sacrifice loophole, as well as a provision that gives employers four months between when super contribution amounts appear on pay slips and the money actually lands in a fund.

“Without action, unpaid super and lost earnings will reach $66 billion by 2024,” the report said.

Missing out

“Younger workers, low-income earners and workers in the construction, hospitality and cleaning industries were most likely to miss out on superannuation.

“On average, affected workers missed out on $1489 or almost four months’ of superannuation contributions.”

But employees in the professions, on higher incomes and in older age brackets are also affected because they are the ones who tend to use salary sacrifice to make extra super contributions.

“Employees do not understand that if they salary sacrifice into super, their employer can use this to meet their SG [superannuation guarantee] obligation,” the report said.

“The key motivation for an employee to make additional salary sacrifice contributions is to boost their retirement savings. This loophole should be closed immediately.”

The Super Guarantee (Administration) Act Super requires a certain proportion of “ordinary time earnings” be paid into super each quarter.

In 2013-14 – the latest year for which statistics are publicly available and therefore the year included in the report – the guarantee was 9.25 per cent. It is now 9.5 per cent.

The report also says the ATO should get more money for compliance activity and ISA will lobby for its members – super funds – to be allowed to recover unpaid super on behalf of their members.

Where employers do not pay adequate SG contributions to the employee’s nominated fund on time, they may be liable for a SG charge.

In 2014-15 the ATO raised $735 million in SG charges and collected $379 million. Last week the Senate agreed to hold an inquiry into unpaid super.

“Despite improvements in their handling, the ATO remains insufficiently resourced to effectively investigate reports of non-compliance,” the report said.

In a report last year, the Auditor-General noted that that the ATO only collected about half of the super non-payments it identified.

“The ATO’s own internal risk assessment indicates that as many as 11 to 20 per cent of employers could be non-compliant with their SG obligations, and that non-compliance is ‘endemic’, especially in small businesses and industries where a large number of cash transactions and contracting arrangements occur,” the Auditor-General said.

“Importantly, this non-compliance primarily affects lower paid employees and those are the most likely to rely on the age pension in later years.”

The ISA report incorporates work by Tria Investment Partners that found 277,000 workers in the cash economy did not receive their full super entitlement in 2014, a loss of $800 million.

Australian Financial Review

2 December 2016

Sally Patten

Retirees will be forced to take money out of the superannuation system if a spouse dies with more than $1.6 million in super.

The warning from lawyers comes as financial advisers caution that thousands more Australians than first thought are likely to be hit by the $1.6 million ceiling on tax-free pensions and will face penalties from the Australian Tax Office if they fail to re-arrange their finances when a spouse dies.

If retirees are forced to withdraw savings from the super system, these will need to be managed separately, potentially adding to the financial responsibilities of senior citizens and triggering higher tax bills.

Daniel Butler of DBA Lawyers said the application of the $1.6 million pension transfer balance cap was akin to a new death tax, adding that it ran counter to a number of government policies (such as the ability to split super contributions with a spouse) that encourage couples to even out their super balances.

“This government has said it is not pinching our super, but mums and dads will really be up in arms about this. This is the a new death tax by disguise,” Mr Butler said.

Other experts said they were concerned that the implications of the $1.6 million cap were little understood by savers.

“This is certainly an issue that has not really come up but it will over time. People haven’t digested the $1.6 million balance transfer cap yet,” said Sam Henderson of advisory boutique Henderson Maxwell.

“I think people haven’t appreciated this yet. It has almost been a bit tucked away,” added Suzanne Mackenzie, a principal at DMAW Lawyers. However Treasurer Scott Morrison said that the issue had been “clear” since the second tranche of the draft legislation was published in late September.

The alarm stems from the Coalition’s decision to include super death benefits in the transfer balance cap. Under the pension rules, when a person dies their pension must be cashed out, either as a pension or a lump sum outside outside the super system. When the $1.6 million pension transfer cap is introduced next July, the surviving spouse will be able to engineer their finances so that they can maximise their pension holdings and retain any extra savings previously held in their pension account in the accumulation phase.

But if the deceased spouse has retirement savings both in a private pension account and an accumulation account, any money in the accumulation account will need to be removed from the super system altogether and managed separately. In addition to being managed separately, earnings will be taxed at their marginal tax rate rather than 15 per cent in an accumulation account or tax-free in a pension account.

In both these scenarios it is likely that super fund members, particularly those in self-managed schemes where there is no professional trustee, will need comprehensive tax advice to arrange their affairs in accordance with the law.

After the death of one member of a couple, the surviving spouse will be given 12 months to comply with the rules. If they fail to act and the combination of their pension and their spouse’s pension exceeds $1.6 million, they will be penalised by the ATO. The earnings on excess savings will be assumed to be about 9 per cent, regardless of the actual rate of earnings, and taxed at 15 per cent. Future breaches will incur stiffer penalties.

If a super account is found to be holding accumulation savings in breach of the law, the fund will be found to be non-complying.

Ms Mackenzie said the government should have considered more closely a combined pension cap for couples. A combined cap, she said, “at least would mean that for elderly people who are relying on an income stream to support medical needs, it means they can keep their money in the super system where income is taxed at 15 per cent”.

Mr Morrison said it would have been unfair to allow couples to combine their caps.

“As the transfer balance cap applies to individuals, not couples, it would not be equitable to exclude reversionary pensions from the $1.6 million. Doing so would allow some individuals to have up to $3.2 million in the tax-free retirement phase,” the Treasurer said, adding that savers had sufficient time to adjust their financial affairs.

Australian Financial Review

16 December 2016

Sally Patten

As many as two in five self-managed superannuation funds hold either residential or commercial property, although such investments still make up a small portion of schemes’ overall portfolios.

The proportion of self-managed funds that hold residential property rose to 22 per cent in 2016 from 19 per cent a year ago, while the proportion of schemes investing in direct commercial property, and so excluding listed property trusts, rose to 20 per cent from 18 per cent, a survey by the Financial Services Council and UBS Asset Management shows.

The research also found that self-managed super fund trustees are heavily invested in property outside super.

Of those savers who either supplement their self-managed fund income in retirement, or expect to do so, 44 per cent said this would come from property investments. The figure is far higher than the 34 per cent who said their income was or would be supplemented from share investments.

The findings underpin investors’ search for income-generating assets as they combat low interest rates, plus the attraction to property thanks to soaring prices on the eastern seaboard.

But the growing interest in houses, apartments, offices and factories may put self-managed fund returns at risk if there is a correction in the market.

Returns are also likely to be crimped by bank moves to toughen interest-only lending. This week Commonwealth Bank of Australia became the latest bank to say it would increase mortgage rates for property investors and reprice interest-only loans.

One of the biggest changes in the past year was a jump in the proportion of do-it-yourself schemes owning international shares, up from 23 per cent of funds in 2015 to 30 per cent in 2016. More funds also invested in exchange-traded funds (ETFs), which are listed products that track an underlying index.

$1.5 million the magic number

The rising popularity of both asset classes suggests trustees are becoming increasingly aware of the need to diversify their portfolios away from the highly concentrated Australian sharemarket.

Given that ETFs are low-cost products, the trend also suggests investors are becoming increasingly concerned about fees in a low-return environment.

In a sign that the new restrictions on super contributions due to come into force in July will curtail the ability of retirees to rely solely on their super for income in retirement, 27 per cent of respondents said they would need $1.5 million of savings to support a comfortable retirement.

The median sum required to live a comfortable retirement was $1 million.

“How can you achieve $1 million in super savings under the restrictions that are coming in?” said Bryce Doherty, head of UBS Asset Management for Australasia.

“Reducing the non-concessional cap generates a headwind to getting to where they need to.”

From next July the amount of pre-tax money individuals can contribute to super will fall to $25,000 a year, down from $30,000 or $35,000 depending on a saver’s age. Annual post-tax contribution limits will fall to $100,000 from $180,000.

In the past year the proportion of self-managed funds using a financial adviser fell to 42 per cent from 46 per cent, while the proportion of schemes being advised by an accountant rose to 30 per cent from 25 per cent.

Australian Financial Review

16 December 2016

Duncan Hughes

More than one in three commercial property sales are a result of “panicked” self-managed superannuation fund (SMSF) investors fearing changed super rules will increase potential liabilities. This is up from one in four a month ago.

So says Rorey James, head of strip retail sales for CBRE, the nation’s largest commercial property company. He says feedback from its national network of sales teams suggests sales volumes are steadily rising as private investors divest assets.

This is despite repeated warnings that pre-emptive sales might be unnecessary and result in more costs if another property is bought.

From July next year, the tax-free status of super income generated from pension balances greater than $1.6 million will change. Further, pre-tax contributions to super will be capped for everyone at $25,000 a year.

It means SMSFs with more than $1.6 million in the pension holdings of their super fund will be required to move any excess into the accumulation holdings, where earnings will be taxed at 15 per cent. It also means SMSF trustees relying on current higher contribution caps to service loans in their super funds may have to make other plans.

Property agents warn supply of retail and office complexes is turning from a “drought to a flood” as worried super scheme trustees dispose assets ahead of the June 30 deadline.

SMSF specialists fear trustees are being panicked into selling because of misplaced fears that retail and commercial property assets could turn into expensive liabilities.

“There is no need to panic,” advises Peter Hogan, technical specialist for the SMSF Association. “There is no requirement to sell off any assets in preparation for the rule changes.”

Hogan recommends those in doubt, or needing to restructure their fund, contact a specialist accountant or financial adviser.

James estimates about 25 of 70 deals in the past two months have been initiated by SMSF owners and says numbers are increasing.

“We are expecting a pretty strong supply in the first half of next year,” says James about proposed sales in the pipeline. “Superannuation sales and pent up demand will drive the market.”

Doctors, lawyers, factory owners and business people have been making the most of generous tax concessions to buy their surgeries, chambers, factories or offices in their super schemes.

The average commercial property holding in an SMSF is about $700,000 compared with $400,000 for residential property, according to the Australian Taxation Office. In total, $70 billion is invested by SMSFs in commercial property, three times that invested in residential.

James claims there has been a turnaround from the first half of the year when lack of supply helped push up demand in a strong buyers’ market. A well-presented retail property in a popular retail spot with long leases and quality tenants potentially offers strong revenues from rental income and capital growth, particularly in Melbourne and Sydney.

Recent sales include a 350-square-metre, single-storey Centrelink office on Burwood Highway, Belgrave, about 48 kilometres south-east of Melbourne. The property, which was bought by an SMSF investor in 2012 for about $1.3 million, sold for nearly $2 million, according to CBRE.

“The seller believed there were hefty tax implications from June 30 next year if the property was retained in the fund,” says James.

‘From a drought to a flood’

A shop opposite one of the nation’s strongest performing Coles supermarkets in Melbourne’s Glen Huntly Road, Elsternwick, is another SMSF investment being being advertised for sale. The 278 square metre property is fully leased to two longstanding tenants that provide annual income of $107,000.

ANZ Bank premises at 307 Clarendon Street, South Melbourne (which a couple acquired for $1.52 million 16 years ago as a retirement nest egg), sold for $5.7 million at auction this month.

“It has turned from a drought to a flood,” James says about the pick-up in second-half sales of retail properties under $5 million. “The market is still good but a lot of people are reviewing their portfolio as they enter, or get close to, retirement.”

Hogan cautions trustees with concerns to “not act rashly and sell down assets” before receiving advice on the impact of the new super rules.

He adds investors with commercial properties in their super portfolios do not have to sell them if they are worth more than $1.6 million.

“There has been confusion on this issue,” says Hogan. “Just because a property exceeds $1.6 million in value, you don’t have to sell.”

Assets exceeding $1.6 million in an SMSF will have to be spread across two holding accounts within the fund — the pension account and an accumulation account, he says.

“It’s worth remembering there is nothing new about the process,” says Hogan. “It is common practice for actuaries to apportion values across the two accounts in an SMSF.”

Two accounts are routine in an SMSF when there are various members and some are already retired and drawing a pension.

“Another misconception among some super investors is that they will be hit with a retrospective capital gains tax (CGT) if they don’t sell a property before June 30,” says Hogan.

“That’s wrong. The government has waived the CGT liability on any increase in a property’s value up to June 30, 2017, if the asset is moved into the accumulation account.

“It’s also worth comparing how these funds would be treated outside the SMSF/super environment – 15 per cent [in an accumulation account] is still a very attractive rate.”

Those considering the sale of a property should also consider the transaction costs and time involved.

For example, agent commission for selling a commercial property is about 3 per cent, there may be CGT and the purchase of another property will attract stamp duties.

Trustees unsure about their fund’s holdings should seek advice from an accredited financial adviser and accountant with specialist experience.

Also confirm whether property fits your fund’s strategy, says Andrew Peters, managing director of Semaphore Private, an accredited financial adviser.

Investment strategies need to consider accumulation of assets, investment risks, likely returns, liquidity, investment diversity, risks of adequate diversity and the ability to pay member benefits

The Australian

15 December 2016

James Kirby

Steve

It’s time for Australia to do away with the means test for retirees, like New Zealand. Until we do, this nation’s saving’s policy will become totally stuffed

James

There has been a great interest in overseas pension systems since it became clear this year that our own superannuation system is now dreadfully complex, regularly inconsistent and in patches – unfair. ie the example cited in the answer to Sean below which is surely a classic ”unintended consequence’.

In fact your idea has been given some academic weight recently in a new report from the ANU Tax and Transfer Institute – however you might be disappointed to know the authors conclude a straight copy of the NZ system here would be ‘unsustainable” due to our aging population…NZ does seem to win on many key scores such as older worker participation.

My personal view is that the superannuation system has been fixed by band aids too many times now – including the latest band aids from the Turnbull government – as a result politicians are very unlikely to be willing to open this subject up again so soon.

Sean

Hi James. My wife and I have about $800,000 in assets and currently receive a modest part pension. We understand our entitlement will be much lower from January.

I have been told there may be some Centrelink benefit over time by investing some of our money into a long-term annuity (say $200,000), but it seems to me that locking in current low annuity rates for many years just to get a small Centrelink dividend over time is far inferior to investing the same amount “in ourselves”.

By that, I mean taking a number of domestic and overseas trips and generally living it large while we are both still quite healthy and active. I reckon we can spend about $200,000 making the next two years the best of our lives.

For doing so the Government is happy to give us an immediate guaranteed effective return on our “investment” of 7.8% (additional $15,600) each and every year for life.

Given current market conditions, this is more than we can sustainably draw off our capital if it remains invested as is in our allocated pensions (let alone an annuity), so we will actually increase our annual cash-flow by making this investment.

Further, if we travel mostly within Australia, we are unrestricted in the length of time we can be away from home (and not lose our Centrelink) as well as stimulate the local economy to boot. (We can even rent out our home on airbnb while we’re away to offset our travel costs and keep the dream alive even longer!)

This seems like a win-win-win. Am I ready you ask? You bet I am. Am I missing something?

James

Your extensive question gets to the heart of what is wrong with the current system – but to answer you directly first: Yes you will certainly lose a lot of the access you currently have to a part pension when the new changes come into effect on January 1.

Take a look at a feature we ran in the WEALTH section on Oct 4 called Saving or Slaving: Finding the sweet spot in super we found that someone with $700,000 in super assets did not do as well as someone with $500,000 in super assets under the new system – by this I mean the combined income they get from their super and their pension access was better with the lower savings than the higher savings …this is a most unfortunate outcome of the super changes and many people – like yourself – will likely find it to their advantage in some fashion to spend more and save less….

One observation though of course – in terms of missing something – is that an individual with higher super savings will always be in a stronger position in terms of total wealth – and should be less dependent on changes to government welfare policy…I will try and give a more specific answer to you Sean if we have time today…

The Australian

14 December 2016

Jack the Insider

That great sector of the Australian community, retirees, is being set upon again by government. The issue has passed barely noticed in the media but the political consequences for the Turnbull Government are sure to be profound.

On January 1, 2017, changes to the aged care assets test will see more than 100,000 Australians lose their part pension payments in entirety.

More than 300,000 will have their pension payments cut.

There is a perception many retirees are rolling in money. They have assets many could only dream of. Perhaps that’s why the media has shunned the issue.

Let me ask the question, who among us could lose 20 per cent of our household incomes and come away unscathed?

It gets worse. With the loss of the pension, the government will also cancel retirees’ pensioner concession cards which allow them to enjoy discounts on council rates, car rego, energy bills and public transport tickets. Back of the envelope, that’s three grand per annum retirees will have to find.

Those in the gun on New Year’s Day 2017 are fretting. They have worked and paid their taxes all their lives. They are in their 70s and 80s. They have no other income or indeed any prospect of it other than their investment returns. This group of nearly half a million Australians are facing grave financial uncertainty with its contingent anxieties and worry.

Under the new arbitrarily determined figures, the government will start reducing pensions for retirees with assets, excluding the family home above

$250,000 for a single homeowner (up from $209,000); $375,000 for a homeowner couple (up from $296,500); $450,000 for a single non- homeowner (up from $360,500) and $575,000 for a non-homeowner couple (up from $448,000).

The cut off for any pension payment is now $542,500 for a single homeowner (down from $793,750); $816,000 for a homeowner couple (down from $1,178,500); $742,500 for a single non-home owner (down from $945,250) and $1,016,000 for a non-homeowner couple (down from ($1,178,500).

Many would view these figures and wonder why these retirees should receive any assistance from the government. It’s important to remember retirees at this sort of level are often asset rich but cash poor, living off modest returns from their investments. With interest rates at all times lows, they may as well keep their cash in a shoebox under the bed. With equities markets smacked by two global economic crises over the last twenty years, anyone who can grow their investments by more than the rate of inflation deserves a medal.

In practical terms those who have saved more for their retirements and managed their investments well are being punished. Assuming a 3.50 per cent rate of return on investment, a home owning retiree with $600,000 in assets excluding his or her home who now has no access to a pension payment stands to earn $21,000 a year, while a home owning retiree with $300,000 in assets excluding his or her home and a part pension of $18,904.60 will receive $29,404.60 annually. Go figure.

The government says these savings will reduce the budget deficit by $2.4 billion over the next four years. I think any sensible person would agree budget repair needs to be addressed but there is an in-built retrospectivity at work here. Retirees who used the existing limits to manage their income have found the goalposts have been moved.

Now that the rates and cut off points have been recalibrated, what does the government expect will happen? Clearly, many retirees will sell down their portfolios, cash out their super or spend it down. Some will sell their dwellings and tree or sea change it. Not that the cost of the family home comes into the calculations. It is only whether the retiree owns a home or not. Those with homes in the inner cities will have to contemplate a shift to places where crucial services like health care are scarce.

For the next generation of retirees, there is an active disincentive to save. There is a form of social engineering going on here. The government is telling the punters, don’t save or at least don’t save very much for your retirement or we will be into you.

This is the sort of policy we might expect to see in post-GFC Greece or Italy but here it is in Australia. The Turnbull government has fiddled with a retirement system to a point where they have actually provided a disincentive for people to save for their retirements.

I spoke to one retiree who has assets just below $600,000. He owns his own home. As of January 1 next year, he will lose his part pension and is staring at a loss of one fifth of his household income. I know the man well and I would not describe him as either rich or a rorter. He had saved sensibly for his retirement.

“I’ve voted Liberal all my life. What am I supposed to do now, vote Green?”

“Let’s not say anything we can’t take back, mate,” I joked. I had to tell him the Greens voted for the changes with the government while Labor opposed them.

“Well, my vote would have to go sideways.” he said.

There, in essence, is the problem with our political system and it signals the death of pluralism in this country. The culprits, the major parties, are the architects of their own demise but this issue is one the Coalition will carry like fetid baggage for years to come.

If a dyed-in-the-wool Liberal voter, who has voted Liberal all the way from Menzies to Turnbull is jumping off, I’d suggest the Coalition are in deeper trouble than they realise.

The Australian

13 December 2016

Judith Sloan

You know, I have a rule that if something looks wrong, it almost certainly is wrong. There is another rule I find useful: if the industry super funds put out a piece of research, it is almost certainly misleading and definitely self- serving.

This month, the lobby group for the industry super funds, Industry Super Australia, and CBUS, the industry super fund covering construction workers and chaired by former Labor premier Steve Bracks, issued a report, Overdue: Time for Action on Unpaid Super.

It’s not entirely clear how an individual super fund gets away with sponsoring this type of research. After all, the trustees are bound by the sole purpose test of maximising the retirement benefits of the members. It’s not as if the research were confined to the construction industry or following up unpaid superannuation contributions on behalf of individual members.

But let me return to the report: the numbers quoted in it are essentially made up. According to the panic-stricken summary, 30 per cent of employees miss out on their full super entitlements and, on average, each of them misses out on four full months’ super. Pull the other one.

Raising the tone from yelling to full-throttle screeching, did you know that “without action, unpaid super and lost earnings will reach $66 billion by 2024”? Yes, that’s right: $66bn. Industry Super Australia may have to employ Demtel’s Tim Shaw to make some advertisements on this diabolical state of affairs.

Let me go through the methodology used to arrive at the scary estimate of 2.4 million workers missing out on their full super guarantee entitlements. (The appendix does at least use the term “apparent underpayment”.)

Take the Australian Taxation Office’s 2 per cent sample of individuals and matched member contributions statements, add numerous contentious assumptions and settle on a really big figure. I particularly like this one: “Create an estimate of ordinary time earnings from the salary and wage data on the ATO individual tax returns”.

The errors in this exercise alone are enormous and fail to take into account diverse patterns of employment and job switching that occur in the workforce during a financial year. Whenever I read the term “sham contracting” in the report, I think this description is very much in the eye of the beholder.

It also should be noted that employers have up to four months to lodge the superannuation guarantee contributions they make on behalf of their workers. So just because a superannuation contribution doesn’t appear in the same financial year as the worker’s earnings it does not mean the contribution hasn’t been paid.

We know the figure in the report is wrong because there is a very high degree of compliance with the pay-as-you-earn tax system (more than 90 per cent). Employers who are disciplined in deducting workers’ tax liability are also likely to be disciplined in forwarding their workers’ superannuation entitlements.

But here’s the kicker: when businesses pay their own tax liabilities, it is possible to deduct the costs of superannuation contributions from taxable income only if it is demonstrated that the superannuation money actually has been paid. You see the government has thought of this issue in the past and has devised a low-cost means of ensuring that employers do pay the superannuation contributions on behalf of their workers.

Don’t get me wrong, there are instances where the superannuation guarantee is not paid. But this will be mainly in the case of failing businesses, and these businesses may not be paying the wages of contractors or the bills of suppliers. Workers may even be missing out on their full wages.

It is sad but true that some businesses will fail and, of course, workers become creditors in the event of a firm becoming bankrupt, at which point they may recover their superannuation entitlements. There is also scope to recover superannuation guarantee payments through the ATO.

The other estimate contained in the report relates to the cash economy. Again, what figure would we like here? Let’s face it, some workers are quite happy to participate in the cash economy because they avoid paying income tax. It is entirely possible that they are better off even if there is no superannuation component in the cash handed over.

But according to the arbitrary estimate contained in the report, there are 277,000 workers in the cash economy who are not receiving their full superannuation entitlements. And the average effect on workers is close to $3000 a year.

Of course, there is no doubting that the cash economy is alive and well, but no reliability can be attached to these estimates. Moreover, the report contains nothing sensible in terms of doing anything about the cash economy, which is of course a topic much larger than unpaid superannuation.

There is a funny loophole in the system that allows employers to use a modified salary base (after voluntary salary sacrifice payments to superannuation) to calculate their 9.5 per cent superannuation guarantee obligation. It’s not clear that it’s a really big deal, but workers would be well advised to check their pay slips and ensure that the SG is paid on the unmodified salary base.

In due course, it may be a good idea to combine SG payments with PAYE tax payments, to be paid by employers monthly. No one wants workers to miss out on their super entitlements.

But before this happens the government needs to sort out the default fund arrangement that provides the industry super funds with a quasi-monopoly position for award and agreement covered workers.

The Productivity Commission is investigating alternative methods whereby workers who fail to nominate a superannuation fund can be allocated one. It is important that the vice-like grip of the industry super funds is broken. As all economists know, monopolies are bad. It also will create a more even playing field in which all super funds are required to manage liquidity as well as maximising investment returns for members. Superannuation guarantee payments should not just come in like the tide for one group of super funds while others are locked out of the game.

In the meantime, the industry super funds would be well advised to stick to their legislated role of maximising the retirement benefits of their members and cease releasing questionable research.