21 Mar The Spin Free Zone – Putting Some Facts Around The Story

The Spin Free Zone – Putting Some Facts Around The Story

You would have heard both sides of politics put their spin on Labors’ announcement last week about scrapping the refund of excess franking credits for Low Income Earners, Age Pensioners & Self Funded Retirees/Self Managed Super Funds. Let me try and put some more substance into the position for you.

• Research from the Association Of Superannuation Funds of Australia (ASFA) – the peak policy, research & advocacy body for Australia’s Superannuation Industry shows the average total superannuation balance in 2015-16 for a household headed by a person aged 60 to 64 was around $337,100 with a median value of $154,950. A median value is the amount at which 50% of the population surveyed have less than this amount – so this means 50% of households between the ages of 60 – 64 have < $150,000 in super.
• In 2016, the Australian Tax Office Tax Commissioner Chris Jordan told the SMSF Association national conference there were only six SMSFs that had more than $100m and just 2184 with a balance above $10m.
• Whilst Labor has not released it’s costings it is being widely reported they have relied upon 2014/15 tax data to justify their position. One could assume that this data has not taken into consideration the $1.6m transfer balance cap introduced in July 2017. Balances held in super pensions above $1.6m will have taxes of 15% deducted from the assessable income of the SMSF. This tax will negate to a fair degree franking credits claimed in large funds
• ATO Data released by Actuaries Rice Warner shows that Self Managed Super Funds have on average 25% – 30% of their assets held in Australian shares.

• As is being used to justify the introduction of the new rules Labor is saying that SMSF’s are getting tax refunds of $2.5m a year & saying that they will generate savings to the Budget of $59 Bn over 10 years. This seems disingenuous as: –

1. A SMSF would need to have a balance of > $100m and be all invested in Australian shares paying fully franked dividends (when average for funds > $10m is only 32%)
2. It would not appear to take into consideration taxes of 15% levied against income of SMSF’s where balance is > $1.6m

Let me use a worked example to illustrate further. Let’s say a person has $4m in a SMSF. $1.6m is held in a tax free pension account, whilst the balance of $2.4m is held in accumulation phase accruing taxes of 15%. Australian Shares can all be held in the accumulation account. Let’s assume that 30% of the fund’s total assets ($1.2m) are held in Australian shares franked to 70% and the fund receives 4% net income on all fund assets. The following table illustrates

SMSF                                         $4m        $ Tax Free        $ Taxable
Account Balances                                       1600000          2400000
Income Shares                                                  0                    48000
Income Other                                                  64000              48000
Franking Credits                                               0                    14400
Taxable Income                                                0                  110400
Tax On Taxable Income                                    0                    16560
Less Franking Credits                                                            14400
Net Tax Payable By The Fund                                                 2160

Actual Income Of The Fund                                                160000
Tax Paid 2160
Actual Net Income Of Fund                                                157840
Effective Tax Rate Of Fund                                                     1.4%

So a person with $4m in super can pay an effective tax rate of only 1.4%, or the government collects $2,160 from a person who has $4m in superannuation.

Superannuation is a pool of monies that unfortunately Politicians from both sides of politics cannot keep their grubby little fingers out of. I have been a practicing financial planner for > 25 years and if I went through every rule change over that time your head would spin. Now if someone has the gumption to talk about complete tax reform (Can anyone say the “Henry Review”), instead of just “cherry picking” bits that suit their own political agenda, then I am all for it. Superannuation is however an extremely important part of our financial system and provides ongoing benefits not only to retirees but also to Australia as a whole. Benefits as pointed out by ASFA in a 2016 research paper are as follows: –

• Super saves the Government $7 Bn annually in Age Pension payments and this figure will only increase over time as the system matures
• The cost of the Age Pension and tax concessions available to the super system (est. $16 Bn net) are sustainable moving forward
• Financial or tax assistance provided by the government is broadly comparable across all income tax brackets (not just the top end)
• The bulk of superannuation tax concessions via concessional contributions go to middle income earners
• High income earners get most tax benefit from Capital Gains Tax rules, Negative Gearing & exemptions for the Family Home, not Superannuation

I have provided a link to the research paper below for you to read at your leisure

https://www.superannuation.asn.au/ArticleDocuments/265/1603_Mythbusting_super_tax_concessions.pdf.aspx?Embed=Y

Gives some food for thought though – investment property, negative gearing, superannuation have all been on the hit list. Is the Family Home next …….?