The fallout from this week’s federal budget continues. As I noted yesterday, it was a pretty weak budget all things considered. Nothing of any substance. Nothing to grab the reigns of the country and ride it to a sunny future.
But there were some interesting tidbits in there — in particular some changes to the much-beloved superannuation system. An article in the Australian Financial Review yesterday caught my eye about said changes. The title reads: ‘AFR readers dismiss super caps as disgrace’.
Thems fightin’ words if you ask me. But I can see where the AFR readers are coming from. After getting a cushy ride with super over the last decade some people are asking, ‘why now?’
If you had a wonderful tax-free environment to look forward to, and an easy way to pay considerably less tax, you’d be a tad annoyed too if it was taken away.
No wonder the (almost retired) masses are crying, ‘why makes changes now, right when it’s going to impact us? Why makes changes at all?’
Of course, the reality is that, any time there’s a change to the super system, some segment of the public will be left worse-off than others.
If changes to superannuation caps weren’t this year, they’d be next. And the next crop of retirees would be saying the same thing, ‘Why now? Why us?’
But if you delay change every time someone asks ‘what about us?’ then nothing would ever change. Sometimes you’ve just got to suck it up and deal with it. Now that might sound a tad harsh. But most people forget that the superannuation system in Australia has done a lot of people a world of good. Well, mainly the baby boomers, in any case.
In reality, superannuation is the beast that got out of control.
The stats don’t lie — but they’re a little unbelievable
Let’s take a quick look at the latest ATO tax statistics from the 2013/14 financial year (these are the most current). I touched on some other ATO statistics in yesterday’s Money Morning when looking at the number of people earning big bucks in Australia.
Today, though, I had a trawl through the ATO’s superannuation tax stats; in particular those relating to self-managed super funds (SMSFs).
Now, I appreciate the stats here are a couple of years old…but they’re not far off.
Nonetheless, in 2013–14, there were 465,946 SMSFs. Compare this to 2009–10 when there were just 208,285. That’s a 123% growth in just a few years.
In the 2009–10 financial year, those 208,285 SMSFs paid net tax of $2.19 billion. That was paid on taxable income of $14.67 billion. For simplicity’s sake, that works out at an average of $10,517 in taxes paid per fund.
Also, with some basic math, that gives an overall tax rate of just 14.92%.
In 2013–14, 465,946 SMSFs paid net tax of $2 billion. And that was on taxable income of $13.49 billion. That works out to around $4,298 in tax per fund…
Let’s also add the fact that every year the average balance of SMSFs continues to grow. In the 2009–10, average assets per SMSF was $811,595. In 2013–14, it was a whopping $1.06 million.
Say what? That doesn’t seem right does it? No, it doesn’t. But the stats don’t lie.
Let’s run through that again: 123% more SMSFs from 2009–10 to 2013–14. And 31.3% growth in average assets per SMSF from 2009–10 to 2013–14.
Yet…they paid less tax and made less money than three years prior.
Oh dear. If you’re the government, that’s not how the system was supposed to work.
Almost the biggest stock in the world
Think about superannuation as the government’s own stockholding. In fact, view the SMSF pool as one big company. Let’s give it the stock ticker ‘SMSF’.
The government owned 208,285 shares in this ‘SMSF’ in 2009–10. And it delivered $10,517 per share. At this point the ‘SMSF’ market cap was about $189 billion.
Fast forward a few years and the government now owns 465,946 shares in ‘SMSF’. The market cap is now around $496 billion. Now, if the return (tax paid) to the government was even remotely close to what it was in 2009–10, then the government might be looking at net tax receipts of, say, $4.9 billion.
But that’s not the case now, is it? Nope. The stock now returns $4,298 per share. The stock has grown significantly, but the returns have not. Tax receipts are a trickle over $2 billion.
If you look at it from a purely investment point of view, the government’s return has been abysmal. Tax per fund has fallen by over 59%. That’s a poor return. If they could they’d probably sell this dud…
But they can’t. They can’t get rid of it. So they can only do what they can do. And that’s change it.
After all, they’re trying to get better return on their investment…
It’s a government ‘own goal’
What makes this interesting too is that, from 2012, funds in ‘full pension phase’ didn’t even have to report income on the SMSF return. That means actual income was likely considerably higher. But that means little really because, for the government, it’s about how much tax revenue they can generate from super.
If anything, with an increasing number of retirees and SMSFs in ‘full pension phase’, there’s an even bigger reason to start whacking on more taxes.
That’s exactly why this government — and every government from this day forth — will try to plunder the superannuation pool. They simply have to.
They have to tame the beast and get it to pay them back.
It’s an ‘own goal’ really. They’ve put all this work into superannuation. No doubt with the long term view it would pay them back. But it’s bit them on the backside. And keeping it the way it is, or making it a more tax-free environment is a dud economic strategy to follow.
That’s why you shouldn’t be surprised that they’re doubling tax on high income earner contributions… and why you expect contributions caps…and why more restrictions and regulations are coming.
You should expect more taxes. Expect more restriction. Expect the worst. The new reality is the super-gravy train is coming to a halt. The party’s over people.
From my view, the worst is yet to come. The whole $2 trillion beast that is the super system is out of control.
It’s a big, fat juicy tax target. And it might be the only way the country ever gets close to an economic surplus in the next decade or two…or three.
What can you do about this approaching storm? Well, what do you think? Be smart, hedge your bets. Something’s going to happen, and it’s coming fast. So you can sit idly by and watch it unfold. Or get ahead of the game and look at other ways to grow and protect your money for the most important person — you.
Editor, Australian Small-Cap Investigator
Ed note: This article was originally published in Money Morning.