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Matthew Smith has been a business and financial journalist for more than a decade. He previously worked with the Financial Times Group, reporting from New York on company buyouts and refinancing in the wake of the Global Financial Crisis. He started his career reporting on the funds management industry in Sydney.

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Super revolt: Labor’s tax grab awakens superannuation’s sleeping giant

Published 21 February 2013 00:16

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Super revolt: Labor’s tax grab awakens superannuation’s sleeping giant

Battle-ready ... ASFA chief Pauline Vamos says a $1 million threshold for super tax changes is too low. Photo: Angus Mordant

When the SMSF Professionals Association of Australia (SPAA) held its annual conference in Melbourne last week, the theme was decidedly big picture: “Revolution”.

It was apt. With almost 500,000 funds and 900,000 individual members, the women and men behind Australia’s self-managed superannuation sector form a standing army with enormous clout.

And it’s an army on the march, determined to head off any changes that threaten Australia’s $1.4 trillion in superannuation. Tinkered with endlessly, super has nevertheless largely remained a no-go zone for the tax man. But there’s every sign that’s changing.

Desperate to find money to fund its election promise and patch up its budget shortfall, the Gillard government is examining ways to take more tax from the super sector. The lobby groups surrounding the sector are circling the wagons to block any changes, warning that Labor risks alienating a powerful electoral bloc by removing concessions.

Labor, it says, is playing with fire.

“It is a very large group of people that would be materially impacted by changes to the current system. And they all vote,” SPAA chief executive Andrea Slattery said as she prepared to address the SPAA delegation at the Association’s annual conference in Melbourne. “We’re asking for a call to arms by SMSF trustees and members asking for bipartisan commitment to a stable and equitable system.”

Slattery is starting a petition she hopes to populate with up to 500,000 signatures of SMSF trustees asking for that bipartisan commitment.

Prime Minister Julia Gillard and Superannuation Minister Bill Shorten are already trying to calm the waters, stressing that people over 60 will not face increased taxes on super withdrawals and saying any changes will be aimed at high-income earners.

But that’s not enough to placate the super industry – the cuts are coming.

Based on Treasury predictions, it costs us about $32 billion to fund the system conceived under Paul Keating’s Treasury in the mid-1980s. The government arrived at this figure by adding up all revenue it would have earned if the roughly $1.4 trillion in super was invested elsewhere where non-concessional tax rates apply.

A population that has for 20 years been taught to take pride in its strong savings culture – underpinned by the fact everyone has a slice of their wage taken out before it hits their bank account – may be shocked to hear superannuation for the first time referred to in terms of what it costs us rather than how much it helps us save.

By openly targeting super as a potential source of revenue, many believe the government has misjudged the voting and lobbying power of this deep-pocketed and wide-reaching portion of the community.

“I wouldn’t underestimate the sort of damage that could be done with bad policy here,” says Suzanne Mackenzie, corporate, commercial and practice leader of South Australian law firm, DMAW. “People are very attuned to their super; more and more people on regular incomes are getting their statements to find they have $90,000 or $100,000 invested in super and any changes to the system will directly impact account balances of this size.”

A powerful lobby

The government should have a fairly good idea of the strength and energy behind the superannuation industry lobby. For instance, the Financial Services Council (FSC) recently asserted its influence by lobbying to have retail funds considered alongside industry funds as the default option for award-paid employees – about 80 per cent of the roughly $11 billion that flows into default funds each year lands in an industry fund.

The FSC lobby was instrumental in the creation of MySuper and the subsequent Productivity Commission report, which led to the government’s Fair Work Amendment Bill 2012. FSC’s board of directors is stacked with heads of Australia’s most prominent retail financial services businesses, including Macquarie Bank, MLC, AMP Financial Services and Commonwealth Bank.

Next to FSC stand the Association of Super Funds of Australia (ASFA), the Australian Institute of Trustees (AIST) and the Affiliation of Superannuation Practitioners (ASP). These are all well-funded, purpose-built lobbying bodies that represent the various parts of the $1.4 trillion-plus super industry, including retail, industry and self-managed fund trustees, their investment and service providers.

After 20 years of compulsory contributions, the super industry has certainly amassed enough power and influence, not to mention money, to now be considered the decisive force in the toing and froing of popular opinion that defines our political system.

Although the government may have previously tested the lobbying power of segments of the industry on dividing issues such as the default option debate, many believe all sides of the industry could band together in a “super” super lobbying force if the May budget reveals the type of concession cuts or new taxes consistent with the tone of what the government has already foreshadowed this year.

“They’ve missed the mood in their electorate,” one super association director says of the government’s believed aim to find ways to bridge federal budget shortfalls by tapping into super concessions. This person prefers to not be named because he is in regular contact with Treasury, discussing the super rules and concessions leading up to the May budget announcement.

“They think they are winning votes by being seen to be targeting high-income earners, but even the low-income earners want them to leave the rules alone,” he says.

They think they are winning votes by being seen to be targeting high-income earners, but even the low-income earners want them to leave the rules alone.

United we stand

To know the impressive growth and market share of the self-managed superannuation fund (SMSF) segment is to know only part of the potential influence of the SMSF group as a lobbying force. The sector now holds about one-third of the nation’s total superannuation assets and accounts for about 900,000 individuals who are members of self-managed funds.

The SMSF industry continues to grow: more than 36,000 funds were established in 2012 alone. The net growth rate of new funds was 26 per cent in 2012, coming off the back of 84 per cent net growth in 2011, the highest rate of growth since the Tax Office began measuring the size of the young industry.

However, if you consider the number of individuals within industry and retail funds who are considering starting their own funds, or are happy to stay within their existing fund if they can get more control over their investment decisions and freedom over the handling of their assets, then the reach of the self-directed investor in superannuation stretches much further.

Like retail funds, industry funds are tailoring their offerings to appeal to self-directed investors, beginning with greater choice of fund and tailored investment options. Industry not-for-profit schemes reinvest whatever they earn in fees back into the funds, but it’s still in those funds’ interest to stem any flow of large-balance accounts leaving to start up SMSFs, because industry schemes rely on scale for their survival.

The self-directed investor, then, becomes the string that ties the various associations together, and could be the driving force behind the various industry segments banding together.

Former NSW Liberal Party leader and Financial Services Council chief executive John Brogden describes the SMSF industry as “the least politically organised but most powerful group of people in the superannuation industry”.

And it’s a market in motion. Within his own membership base, Brogden points to the recent acquisitions in technology companies servicing the SMSF market, including AMP’s acquisition of Cavendish, and CBA’s stake in Class Super through its accounting subsidiary Count Financial, as evidence of the growing influence of the SMSF industry throughout the various super associations.

Politically unorganised it may be, but the SMSF sector is potentially a potent voice in any debate on super’s future, Brogden says.

“You don’t just stumble into an SMSF, you chose to be there, and you make the conscious decision to make your own investment decisions and deal with onerous compliance.

“These are focused and motivated people.”

In search of a leader

If, as SPAA’s 2013 conference banner proclaims, the SMSF revolution is coming, it’s having a hard time finding a leader. There is currently no grassroots organisation to represent the interests of the individual SMSFs, their trustees and members.

KPMG director of superannuation and taxation Ross Stephens says that the trust structure of an SMSF means one person in the fund plays a fiduciary role and therefore not all members are likely to be part of the decision-making process of that fund, making the group as a whole look somewhat disparate.

ASFA’s brief is to represent the interests of all trustees. Indeed, ASFA has possibly the broadest representation of trustees in its membership base across the super industry. But even ASFA would admit SMSFs are more of an omnipresent force rather than a defined group.

SPAA is possibly the most representative body of the SMSF industry, but its members are the professionals that provide services such as accountancy, legal and broking, rather than the trustees themselves.

Lavishly supported by a long list of fund managers and service providers targeting the rich and growing segment, this year’s SPAA conference could have given the revolution the spark it needs.

But the conference program was dominated by sessions devoted mainly to interpreting and deciphering the myriad new rules applied to self-managed structures.

So it felt more like the SMSF army was gingerly picking its way through a patch of lantana rather than rallying on the national political battlefield and celebrating an assertion of unity.

Budget for change

There are enough theories in the press and on the lips of technical experts who regularly consult with Treasury to know what changes the federal government might make to claw back some of its super concessions or generate revenue for its other fiscal priorities, but at this stage it’s all just a guessing game.

Whether the speculation that seemingly wafted out of Treasury in February that the government is planning to tax payouts from superannuation balances greater than $1 million was a red herring designed to gauge a reaction in lieu of some other announcement is not yet clear.

ASFA chief executive Pauline Vamos believes the government would be damaged if it goes ahead with the $1 million limit. This is because there is a high proportion of the population that would fall into the category and would possibly look to other tax-effective strategies outside super should such a rule be implemented.

Vamos tells BRW that ASFA has recommended $2.5 million as a more feasible figure to work with should the government intend to go down the path of limiting super balance size.

KPMG’s Stephens agrees the government is unlikely to use the limit approach as its preferred method to dip into super. He points to the composition of the $32 billion in concessions touted by Treasury as a clue to where the possible changes to super are likely to be made. More than half of this estimated figure is made up of concessions on contributions; the rest is concessions on earnings.

A “bold” policy the government could be considering, Stephens says, is to take up the recommendation of the Henry Tax Review, which was commissioned by the Rudd government in 2008 and published in 2010. Under this proposal people simply pay their marginal tax rate on money invested in super then receive a flat rebate as a super concession. Other political parties, including the Australian Greens, have voiced support for this plan in the past.

Another way the government could target concessions on earnings could be to increase the 15 per cent rate at which earnings are taxed, a plan Stephens describes as potentially unpopular across the super industry.

Investment consulting firm Mercer recently concluded that countries that tax investment earnings are less competitive on a global comparison than countries that tax contributions.

If the government wants to target the SMSF market while chipping away at contributions and earnings concessions, one thing it could do is eliminate the concession that leaves pensions untaxed. About one-third of SMSF members are in the pension phase compared with about 5 per cent of industry fund members.

A change to the pension concession was another measure suggested in the Henry Tax Review. While it suggests that a single rate of 7.5 per cent could be applied to individuals in both the accumulation and pension phase – rather than the current 15 per cent for earnings in accumulation and nothing in the pension phase – it’s possible a government seeking deeper concession cuts could look to push beyond the recommendations of the Henry report.

Sold well by the government, some Henry recommendations could be acceptable to the industry if it was assured this would put an end to constant tinkering, Stephens says.

Whether the super industry bands together behind the SMSF army will depend on what surprises the May budget holds.

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