23 March 2023
Treasurer Chalmers’ New Superannuation Rules: Non-Indexation Will Have Huge Unforeseen Consequences
The government has announced that from 1 July 2025, individual’s superannuation above a $3 million limit will be taxed at a rate of 30 percent and will include tax on both realised and unrealised gains.
The individual pension account limit, which is indexed in lumps of $100,000, will continue as normal but the non-indexation of the accumulation balance above that will mean that eventually all superannuation above the pension account will be taxed at 30 percent. The taxing of unrealized gains will make the effective tax rate higher than 30 percent. Taxing unrealized gains has awful consequences for those whose super funds are heavily invested in direct property. Farmers who traditionally are asset heavy but cashflow poor, except in the occasional exceptional season, will be particularly hard hit.
Impact on Some Politicians, Senior Public Servants and Senior Military Officers
The announcement was rushed and rather than being put out by the Treasurer with comprehensive detail, it was put out by the Prime Minister apparently to stop even wilder rumors circulating. It was short on detail. When asked what the arrangements were for senior military officers with defined benefits funds and senior public servants—particularly those in the Department of Defence—Defence Minister Marles was embarrassed, not having been briefed. Those very senior persons with defined benefit super funds which include reversionary benefits to their spouse whose membership predates later schemes in many cases have benefit entitlements which on actuarial calculations are worth far more than $3 million! This group of people includes Prime Minister Albanese, ex treasurer Wayne Swan and a host of other senior commonwealth employees. The screams of anguish from cashflow poor farmers expected to pay tax on unrealised capital gains because they bought land in their super funds will inevitably be linked to the defined benefits to be accessed by the these very senior Government employees. Their benefits are greater if they have a significantly younger spouse, as does the Prime Minister, who, as reversionary beneficiaries entitled to draw 60 percent of their indexed pension for the remainder of their lives, following the deaths of the primary beneficiaries as their life expectancy is much greater.
16 Times Defined Pension Value!
When the Turnbull Government capped the pension account benefits for superannuation fund members, those ex- government employees drawing superannuation pensions who had subsequent employment in the civilian workforce had a valuation of 16 times their defined benefit pensions deducted from their superannuation pension account caps. Lots of people are going to be closely observing how Treasurer Chalmers defines the tax regime for senior government defined benefit superannuation pensions to take account of actuarial values above the non-indexed $3 million amount beyond which punitive tax conditions apply. Presumably the treasury officials who advised Treasurer Chalmers on his new rules were not members of the commonwealth defined benefits scheme which was replaced for new employees with a much less generous accumulation scheme.
Having the precedent of the 16 times multiple of annual superannuation benefit, treasury officials advising the government of the value of the defined benefit superannuation entitlements of these very senior people will be under pressure to use a similar valuation formula for the defined benefits of current senior persons including the prime minister, public service mandarins and service chiefs. It should be interesting!
Those in the Worst Situation
Those with substantial property in their SMSFs who are also over the $3 million per member or who will be over the limit by 30/06/2025 are in the worst situation because generally it will be expensive to remove the properties from their SMSFs because of State Government stamp duty on transfers.
With a very few exceptions due to particular circumstances, I advised dentists, veterinary practice owners and business owners to avoid buying premises inside SMSFs in the years following the introduction of the small business capital gains tax concessions in 2001 relating to the sale of active business assets, as in a great many cases they would qualify for generous concessions on sale of practice goodwill and practice/business premises.
Those in Retirement with Superannuation Assets Below $3 Million
Those in retirement with superannuation assets below $3 million need only make sufficient withdrawals to keep their superannuation assets below $3 million on an ongoing basis. Those in retirement pension mode are likely to decide that removing assets above $3 million for individual fund members prior to 1 July 2025 will be preferred to paying tax on unrealized gains, particularly if marginal tax rates outside of superannuation are lower, which will be the case for some retirees. A tax rate of 30 percent on surplus assets inside superannuation including on unrealized gains will become progressively worse due to non-indexation of the $3 million figure. Many will prefer to be able to own assets above their $3 million limit outside of their superannuation fund, including within family trusts, where in some cases capital gains tax can be deferred far into the future.
A tax rate of 30 percent equivalent to the company tax rate is actually worse because it will also be applied to unrealized gains.
Partners have an effective combined ceiling of $6 million if contributions can be evened up. The changes make it imperative for those with the earning capacity to share contributions evenly between couples so that each take advantage of their pension account limit.
Those in Accumulation Stage
Unfortunately, many will now minimize superannuation contributions as confidence in the government not making further detrimental changes is severely impacted.
Family Trusts May Have a New Lease of Life
Lots of relatively high-income earners who have been making substantial superannuation contributions will now pause and re-evaluate their strategy. Lots will reconsider investing outside of superannuation via family trusts in order to postpone realization of capital gains. Some will be attracted to investing outside of Australia. Treasurer Chalmers’ new superannuation regime will have a negative impact on Australia in the long term.
The Real Purpose(s) of Superannuation (Australia’s Foreign Debt) Has Been Forgotten
Lost in the blather about defining the purpose of superannuation is the very limited understanding of the reasons that the Hawke Government widened superannuation so substantially. The Hawke Government was elected in early 1983 when the Labor Party made a late switch of leader to the charismatic Bob Hawke literally as incumbent Liberal Prime Minister, Malcolm Fraser, was driving to Government House to ask the Governor General to approve the election date.
Hawke understood that Australia had a huge and growing foreign debt problem. This was brought about because the share of business income allocated to wages had been too high and the proportion available to reinvest as business capital was too small! Hawke knew that this was not a popular view in trade union circles!
New Prime Minister Hawke was advised that Australians had to save more. The chosen method was to widen the superannuation net to include all working Australians but reduce wage demand. Bob Hawke had to persuade the trade union movement to accept this change and Hawke persuaded ACTU Secretary Bill Kelty to come on board. They structured ‘The Accord’ with the union movement to persuade it to agree to workers giving up a fair amount of wages growth in return for superannuation. The superannuation guarantee levy started at 4 percent (3 percent in small businesses) and grew by degrees. Currently it stands at 10.5 percent of salary. Along the way a huge amount of superannuation has been invested in businesses via share placements in Australia and by investing overseas. Concerns about Australia’s foreign debt have disappeared.
New Treasurer Chalmers appears to be unaware of the underlying catalyst that brought about universal superannuation. His ‘noise’ about defining the purpose of superannuation relates to his hidden agenda of reducing the benefit of those who through a great deal of personal hard work, personal sacrifice and astute investment have built up a substantial superannuation benefit. It is also a reflection of his inability to sufficiently control government expenditure. The Hawke Government had a hardnosed finance minister, Senator Peter Walsh, a no-nonsense farmer from Western Australia who waged war on loose government spending, particularly on those schemes that he defined as rent seekers i.e. schemes designed to set up a continuing series of benefits to an interest group. It is no accident that the only years in which the Hawke/Keating Governments produced surpluses were years in which Senator Walsh was finance minister and was ruthless in his determination to limit wasteful government spending.
Paul Keating does not acknowledge former prime Minister Bob Hawke or former Finance Minister Peter Walsh’s huge contributions without which he would not have been able to bring about substantial changes.
Personal Intention
I will restructure personal assets to comply with the new regime by 30 June 2025. We do not own property in our family superannuation fund.
Credit Suisse and Silicon Valley Bank Collapses
Silicon Valley Bank (SBV) collapsed because of stupidity which led to it mismatching short term large deposits of essentially ‘hot money’—so defined because it can be withdrawn quickly—and investing in long term US Treasury notes (government bonds) at slightly higher yield. As the US Federal Reserve raised interest rates the resale value of its Treasury notes fell since buyers in bond markets were only prepared to pay a price at which their interest payments to maturity had increased with overall market rates rising. Simultaneously SBV suffered massive withdrawals of ‘hot money’ and had to sell treasury notes at a capital loss. The result was that its balance sheet imploded. SBV and other smaller regional banks were regulated by state authorities rather than federal bodies and these local regulators were incapable of dealing with their implosion. US Treasury Secretary Yellen, together with the US Federal Reserve and major banks, has engineered a rescue of sorts whereby the mega banks deposit funds in SBV, but effectively shareholders equity is destroyed as is the credibility of the Californian regulator!
Credit Suisse Buyout by UBS Represents 99 Percent Shareholder Value Loss Since 2007
This is a buyout at a huge discount to shareholders by the Swiss mega bank UBS of its troubled rival. The price paid was approximately half its closing price last Friday and is approximately 1 percent of the value of Credit Suisse in 2007. UBS is backed by the Swiss government. As the saying goes, in troubled times assets pass from weak hands to strong hands.
Australian Banks Are Unquestionably Strong
Australian banks have strong overall regulation via APRA. State governments gave up their banks following events of the late 1990’s and also gave up their state based corporate regulators. Under the Australian Prudential Regulatory Authority (APRA) they only make fixed interest home loans on a short-term basis before resetting the interest rate or converting to floating rates long term. They therefore remove a major source of weakness in the financing of home loans in the US. Yes, I do expect them to be a little less profitable in current conditions but by international standards they are strong. Australian bank hybrid securities are also much stronger in their structure than were the Credit Suisse variety.
AMP’s Destruction of Shareholder Value
AMP’s recent share price has been less than 4 percent of the value its shares traded at on its day of listing following demutualization approximately 25 years ago. If we correct for inflation its shareholder value has all but disappeared. Recently it placed large advertisements for its financial services. Given AMP’s record of destruction of shareholder value it would be a courageous investor who would engage its services.
Financial Success for Dentists
Financial Success for Dentists: Rules for How to Approach Your Dental Career sets out the key strategies which make dentists successful. It is specifically written for those dentists and dental specialists owning their own practices and for those aspiring to own practices. Among the topics included:
· Understand key practice valuation criteria.
· Learn how some dentists inadvertently reduce the value of their practice by $500,000
· Avoid long term errors when purchasing your practice.
There are many accountants, financial advisers, marketing consultants, web site designers and practice advisers who give advice from their particular disciplinary experience, but very few have the wider breadth of experience to define for their clients the key rules to follow to optimize their practice and their long-term financial outcomes. An otherwise competent financial adviser may have little understanding of what makes one practice much more successful than another. Many accountants have detailed knowledge of the taxation rules but cannot identify if a dental client has broached invisible barriers to practice growth or a threat to practice goodwill value.
I spent 33 years examining dental practice financial outcomes and reviewing the key strategies and decisions which separated successful Australian dental practices and practice owners from the less successful and this led to relevant conclusions and advice to dental practice owners.
A complete and comprehensive career guide for mature and aspiring dentists.
Based on real life situations and a lifetime of dealing with dental practice ownership outcomes this book is worthy of Text Book status for every dental teaching school.
—Merv Saultry, Founder Dental Innovations Network
To Obtain a Copy:
· Go to the Delany Foundation website at http://www.delanyfoundation.org.au
· Click on the Donations tab and make a donation of minimum $60. This is easiest by Mastercard or Visa.
· Email graham.george.middleton@gmail.com confirming that your donation has been made, as well as your name and mail address
· A copy of the book will be mailed directly to you
All production costs and mail costs are met by me personally, so all money donated goes to the Delany Foundation which contributes toward the running of schools in Ghana, Kenya and Papua New Guinea. Naturally donations above $60 are welcome.
The donation to obtain this publication will be the most cost-effective practice advice most dentists will ever receive.
Please Pass On
If you like these newsletters, please pass them on to colleagues. Past newsletters and articles in Australasian Dental magazine on business issues are at grahammiddleton.com. I can be contacted directly at graham.george.middleton@gmail.com
Independence And Disclosure
I am not a representative of any accounting practice, financial planning firm, business or marketing consultancy. I spent 33 years as a business and financial adviser to mainly dental, medical and veterinary specialist and general practitioners. Since I retired as a director of a financial services group, of which I had been a founder, on 30 June 2020, I am no longer licensed as an investment adviser. Readers should treat the above as general advice and take professional advice as required.
General Advice
The above is ‘general advice’ and individuals are urged to undertake considerable personal research of companies in which they are investing as well as demanding of their advisers that they tailor advice toward their best outcome after demonstrating an understanding of their position in detail. Be cautious about accepting advice unless you are certain that your adviser has a thorough knowledge of your situation. If in doubt the best decision is often to make no investment changes.
I sold my interest in a financial services and accounting group on 30 June 2020 and have no intention of starting another financial services business. I own, via my family superannuation fund and investment portfolio, some of the stocks mentioned in this newsletter. My website is now available at grahammiddleton.com.
Those who find my newsletters of value to them are asked to consider making a donation to the Delany Foundation, a registered charity which assists schools in Papua New Guinea, Ghana and Kenya. Delany Foundation c/- Holy Cross College, 517 Victoria Road Ryde NSW 2112.
Best wishes to all readers
Graham Middleton
