Government's SMSF changes a lose-lose situation for many funds: Ken Raiss

The federal government’s off again, on again super tax grab has likely done irreparable damage to public confidence in Australia’s superannuation system and simultaneously created the likelihood of a future lose-lose environment for up to 50% of self-managed super funds.  

Many more Australian super fund holders will be hit both in short and long term bull and bear markets than the government has conceded and the short term ‘cash grab’ nature of this proposed legislation has ridden roughshod over much needed long term vision which will short change Australia of future infrastructure investment.  

Whilst the government has argued it will only target super funds with balances of $2 million or more, funds with just a quarter of this figure may in better years accrue earnings revenue that easily exceeds the $100,000 cap and therefore be subject to the punitive higher rate of tax. Case in point is the significant positive upturn seen in the Australian share market which over the last 12 months has exceeded the 20% growth necessary for someone with an investment balance of $500,000 in their super to see a return of $100,000 or more if cashed out for retirement purposes or to pay out home loans.  

Furthermore, for someone hitting the age of 60 there is now a strong likelihood of living a further 30 years and given the cyclical nature of investments many self-funded pensioners could see themselves selling down portfolios when entering downward markets only to be hit with taxes to safeguard their retirement funds. Conversely when they buy back in and in the next cycle sell will be hit with further taxes.  

This means the possibility of four to six tax penalties over their remaining life.  

The government’s lack of foresight will create a lose-lose situation whereby people entering retirement on this figure will over the next 30 years likely see their retirement fund slashed with cyclical downward directions and and then when the market corrects itself they will get slugged again. The super cash grab tax will not just hurt retirees but also small business owners wanting to sell their businesses  

In the current regime small business concessions allow business owners to roll between $500,000 and $1,200,000 of profits from sale of business into superannuation. Given this will automatically be subject to potentially higher tax, business owners are likely to reconsider where they put their funds and look instead at more risky mechanisms than the current relative safety of their super. The hot spots for proposed legislative changes will now see the possibility of the business owner having to pay more tax if they invest through superannuation than if investing outside.  

This is completely at odds with the purpose of superannuation. Small business, property owners and self-funded retirees are the hardest hit again. The compulsory contributions increase from 9% to 12% over time, younger Australians who indubitably will accumulate substantial funds in their super will find themselves in the $500,000 target ‘super pool’ many years before retirement.  

With approximately 50% of self-managed super funds having a balance between $200,000 and $1,000,000 (many more than advertised) hard working Australians will be hit by this regressive impost over time. We could even see the hard work of many experts that have successfully pushed financial literacy into the school curriculum negatively impacted by the constant change in what should be long term and stable financial legislation.  

The industry has talked about a class divide, but the reality is that here we have a government setting itself up against small business, property investors and SMSF trustees as well as every day Australians. This is almost a silent push to get people out of super, which is ironic given it was the same party that introduced the compulsive scheme in the first instance.  

Equally concerning is the lack of government acknowledgement, let alone vision, for the potential of wide scale super fund investment in domestic infrastructure projects, with the heads of large super funds readily admitting that they have funds to invest but no dedicated infrastructure assets in which to invest thanks to the government’s short-sightedness.  

There is no shortage of capital to invest and as a properly managed tool for the future, super should be a mechanism for large scale capital investments that deliver tangible community benefits. For example super funds could be invested into a national first time buyer mortgage scheme which would help many Australians get onto the property ladder and over the long term bridge the growing property gap.  

We should be thinking in terms of abundance instead of scarcity, but sadly the government can’t see can’t see the forest from the trees.  

National Property, Business Tax Accounting and Wealth Advisory Group Chan & Naylor supports the Business Council of Australia’s call to action for the current and future governments to end short-term political fixes in favour of substantial economic reform.

Ken Raiss is a certified accountant and director of Chan & Naylor national accounting firm. Chan & Naylor offers a free five-minute question-and-answer session on its website under the "Ask the Experts" section.