7 September 2015

The broken record of media-fuelled debate about speculated changes to superannuation is still spinning. Sadly, the basis for any such debate is flawed and is counter-productive to engendering confidence within the community.

Let’s start with the calls from a number of self-interested sectors to make the system “fairer” or “sustainable”.

One proposal to tax pension fund investment earnings in excess of $75,000 (i.e. the first $75,000 would remain tax-free) is simply a reincarnation of the Federal Opposition’s policy when last in Government (with the threshold reduced from $100,000). There was no explanation for the proposed reduction in the threshold, which suggests it is totally arbitrary and without any reasonable foundation. Furthermore, it must be remembered that the original measure was ultimately dismissed following feedback from the sector and regulators that it would have been virtually impossible to implement and administer.

Another proposal is to reduce from $300,000 to $250,000 the threshold above which concessional contributions are subject to an additional “high income earner” tax of 15%. This again a totally arbitrary measure. These proposals, it was argued, would raise $14 billion in revenue – but over the next decade! Again, cost-effective administration is a key concern. It would be relatively easy to characterise these proposed measures as a tax-grab that have nothing to do with reform or making the system fairer.

On the matter of sustainability, one key observation we would make is that there is little, if any, evidence to support the view put by some that our current superannuation system (especially its tax-free status for over-60’s) is not sustainable. In any event, it is paramount that any review of superannuation is not done in isolation. Any genuine review must properly acknowledges superannuation’s relationship with our tax and social security systems.

 

Borrowing through superannuation – has the death knell sounded?

The ability for superannuation funds to borrow directly to invest is still in its relative infancy, having only been in place since 2007. Its take up by SMSFs has also been relatively low, with the reported value of assets under limited recourse borrowing arrangements comprising a little over 1.5% of the total SMSF pool of $557 billion. Nevertheless, there continues to be calls from a number of self-interested parties for borrowing to be banned, with support from a corresponding recommendation made in the recent Financial System Inquiry report. We have also observed the recent decisions of at least two of the major banks stepping back from the superannuation lending space. Although, we understand this is limited to residential investment property deals and is principally to do with the pressure on the banks to quell demand for investment property loans in general as opposed to an attack on lending to superannuation funds.

Disappointingly, there continues to be a proliferation of misreporting of this measure being limited to SMSFs, when borrowing is in fact available to all superannuation funds. In our view, any calls to wind back the ability for superannuation funds to borrow directly do not properly address the debate that needs to be had around superannuation and exposure to debt. Put simply, prohibiting superannuation funds from borrowing directly does not prevent them from effectively leveraging their assets through other investment vehicles widely available in the market place.

The real issue with limited recourse borrowing arrangements through superannuation is how and why consumers end up with them. They typically arise in connection with the purchase of real property and more often than not it is the particular property that leads to the borrowing, which may not be the most appropriate strategy taking into account all the relevant circumstances. This is the tail wagging the dog and MGD’s long-held philosophy has always been that advice and strategy must come first, be appropriate in the circumstances and be delivered by suitably qualified professional advisers (preferably under the authority of an Australian Financial Service Licence).

Reassuringly, the Government has made some positive statements on these issues. In a recent speech by the Assistant Treasurer, the Hon Josh Frydenberg MP, he says:

“We should also always remember that despite calls for changes to the system, stability and confidence are particularly important where people are investing for many years, with the expectation that the rules at the time they invest will not be changed before they retire.”

And on the issue of superannuation and borrowing:

“It would obviously be inappropriate for me to pre-empt what the Government proposes to do on this issue, as it forms part of the broader Government response to Murray. However, I do want to emphasise that we have been considering the issue carefully. We want to make sure the approach we adopt is proportionate to the risks identified.”

Disclaimer: This article contains general information only and is not intended to constitute financial product advice. Any information provided or conclusions made, whether express or implied, do not take into account the investment objectives, financial situation and particular needs of an investor. It should not be relied upon as a substitute for professional advice.