27 February 2023

Treasurer Jim Chalmers Preparing an Attack on Our Superannuation?

Dr Chalmers has displayed some woolly thinking thus far about superannuation. His recent 6000-word essay also left economists scratching their heads and revealed his lack of economic experience or credentials.  His doctoral thesis on former prime minister Paul Keating is likely to confuse. He has flown kites concerning possible changes to superannuation.

Very Few Huge Superannuation Funds

There are a relatively few superannuation fund members with huge accounts. Changes introduced by the Turnbull Government stopped non concessional contributions by the wealthy once they reached their pension account limits. While there may be partial consensus about requiring them to remove balances above $5 million from the low tax environment of superannuation, that may not be simple if they are invested in valuable properties. To what extent these relatively few members got lucky with huge investment wins as opposed to loading up their fund with excessive non concessional contributions in the days before the Turnbull Government put a stop to members making non concessional contributions if they had reached their newly defined individual pension caps is unknown.

Backlash Concerning Broken Superannuation Promise 

There is already a huge backlash against the breaking of Mr Albanese’s very specific undertaking immediately prior to the last election that there would be no changes to superannuation. His broken promises are beginning to pile up. History shows that Australian voters are unkind to governments which break promises. Dr Chalmers is also finding that his recent musings about directing super funds to invest in social housing and nation building projects is generating a huge backlash. The widely respected David Murray, who has headed the Future Fund, has dismissed that idea as unsound. Former Union official Garry Weaven, who was the architect of industry superannuation, has publicly advised the government not to interfere with the superannuation system.

The National Broadband Network (NBN) was touted as a nation building project by the Rudd government. It was built as a government project off balance sheet to keep the expenditure out of the budget. Theoretically it was a capital investment but has been a huge loser. If it had been done by a private company, not having government guaranteed borrowings, that company would have been bankrupted long ago. Who would have wanted their superannuation invested in such a financial disaster?

The Snowy Mountains 2.0 Hydroelectricity Scheme established by the Turnbull government with off balance sheet financing is shaping as a financial disaster, years late and billions over budget. Who would have wanted their superannuation invested in this developing financial disaster?

Social Housing Versus Members Housing! 

Reports that Treasurer Chalmers has been pressing superannuation funds to invest in social housing go arm in arm with his strident opposition to superannuation fund members being permitted to draw some of their superannuation to assist with a deposit to purchase their own first home! Yet by purchasing homes they vacate rental housing which is freed up to be occupied by those unable to purchase housing! That represents inconsistent thinking about increasing the stock of housing.

Long ago it dawned on governments both state and federal, Labor as well as Coalition, that encouraging private home ownership was the best way of reducing demand for social housing and reduces the number of public servants managing housing. Schemes to build lots more housing commission homes were largely supplanted by government assistance to first home buyers. Home buyers, overall, look after their own houses better than do some tenants in housing commission houses. I have heard horrifying stories from contractors employed to clean up the damage and mess left by many tenants in housing commission dwellings.

The Commonwealth Department of Defense used to own and manage a large stock of housing for defense personnel but got out of the housing business, selling their houses to investors, and contracting their provision of housing to the defense force. 

Politicians Owning Rental Housing Investments 

Curiously many federal politicians, both Labor and Coalition, own residential rental property investments, including Prime Minister Albanese and other prominent Labor politicians.

Calls in some quarters to end negative gearing ignore the fact that this will reduce the supply of rental housing long term! Such a change would see investment in rental housing diminish instantly. The mere threat of such a change would instantly chill that part of the housing market. Paul Keating tried this as Treasurer and reversed his governments policy on negative gearing when confronted with the detrimental impact on the provision of housing. Nor is the cost to the Commonwealth budget substantial as is often wrongly claimed. The tax deduction claimed for interest payments by borrowers is offset by the tax on interest income paid by lenders i.e. by banks which increases their taxable profit. Those who only look at one side of balance sheets or one side of profit and loss accounts make grievous errors when complaining about negative gearing.

I have long regarded residential rental housing as an inefficient investment compared to commercial property and shares. This is due to lots of costs piled onto residential owners compared to commercial properties whose owners pass outgoings to tenants. High stamp duty on purchase and land tax not paid by investors in the share market make residential rental property a non-competitive investment class for SMSFs.

How Might Government Create More Rental Housing?

1.     Make it more attractive to investors by reducing stamp duty on houses specifically purchased to rent to tenants at arms-length and do likewise with land tax. There is no point in the federal government complaining about a lack of rental housing while simultaneously state governments have land tax and stamp duty barriers to investing in it. By all means require it to be available for long term rental as a condition of obtaining these tax concessions.

2.     Make downsizing more advantageous in order to free up a huge hidden surplus of spare bedrooms across our major cities. There are millions of spare bedrooms across Australian cities. When older Australians think of downsizing, they consider the selling costs of their large homes in the form of agent’s commission including advertising and the cost of purchase of a smaller home in the form of stamp duty, conveyancing and title registration. Many are deterred by losing in the order of 10 percent of the average cost of the two properties in deadweight losses. Make downsizing more attractive by waiving stamp duty and title registration fees on the down sized property. This would encourage more to move to smaller dwellings making more larger houses available to big families.

It is widely understood that the shortage of housing has much to do with slow release of suitable land and onerous planning restrictions as well as Australia’s substantial immigration policy. These are due to state and commonwealth government policies. Superannuation funds are not going to rush to invest in social housing at sub economic rents any more than the treasurer’s parliamentary colleagues are going to line up to rent out their investment properties at below market rents. 

The Teals Skewered by Proposed Superannuation Changes

The Teals who represent electorates housing many of our wealthiest citizens, among whom SMSFs are concentrated, have suddenly realized it is members of their electorates who are under threat from Labor’s attempts to make superannuation changes. Welcome to the world of political reality. It is certain that the Liberals will focus their attention on recapturing these seats from the Teals at the next election and that superannuation will be a major campaign issue. In the near future liberal leader Peter Dutton is set to make it a major issue in the Aston by-election.

We have a family self-managed superannuation fund and believe that we are better at looking after our money than is the government.

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

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.

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Best wishes to all readers

Graham Middleton