Bluestone's Richard Chesworth says it's time to clear up some misconceptions
Labor’s Robin Hood scheme to rob from the rich and give to the poor federal coffers risks upending the self-managed super fund (SMSF) environment for good, leaving investors and their brokers in a state of panic as they scramble to reorganise their investment strategies before the taxman swoops in and redistributes their hard-earned wealth.
Such are the red-scare tactics being employed by the vocal opponents of Labor Treasurer Jim Chalmers’ proposed superannuation tax changes.
As a reminder, Chalmers intends to double the rate of earnings tax – from 15% to 30% – for super balances over $3 million.
It’s worth clarifying that this new tax band is on individual super balances, not SMSF funds themselves. Theoretically, the holdings in a $6 million SMSF could be totally exempt from the 30% tax if none of the individuals’ balances exceeds $3 million.
Richard Chesworth (pictured below), head of specialised distribution at non-bank lender Bluestone, believes people need a clearer understanding of this.
“There's a lot of hype and talk about the tax, but we should remove some of that hype and look at the key pieces of it,” said Chesworth.
He said that around 70% of SMSFs are a two-member fund and just 23% are a one-member fund (three- to six-member funds make up the remainder). Furthermore, Chesworth pointed out that super tax bills will be back to the individual, but can be charged back to your super fund rather than your personal bank account.
Nonetheless, Labor remains on the back foot as it attempts to justify these changes in the face of anti-aspirational, class warfare accusations from the opposition.
“It currently affects half a per cent of Australian super balances. That will grow over time, but I would argue it will grow slowly over time,” assistant Treasurer Daniel Mulino said on Friday.
“I just don’t think it’s credible to argue somebody’s aspiration to do better is going to be affected by a slightly less concessional treatment on an amount in their super fund above a very high threshold,” he added.
Politics aside, what do these super tax changes mean for SMSF borrowing, which is a rapidly growing segment in the broker-originated lending space?
Not a great deal, going by Chesworth’s comments.
Setting the record straight
"In the residential space, we're seeing minimal individuals with over $3 million in super. So it is probably incidental on that basis,” Chesworth said.
Even in the commercial space, only a small percentage of the population will be impacted, he added.
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While “you may have more people coming together in a fund (to invest in commercial)”, Chesworth pressed the fact that super tax “is still worked on an individual basis, not a fund basis”.
Perhaps that is the case now, but it ignores one major aspect of the 30% tax threshold – it is not indexed to inflation, meaning more investors will be captured by the tax over time.
Chesworth agreed, although he suggested that the biggest concern (and certainly the most controversial) is that the tax will be applicable to unrealised gains. In other words, if the value of the property and shares held in your super increases, you will be liable for tax on that increase, even if you haven’t sold the asset and realised the gain.
This is a significant change because it is the first time the Australian tax system will tax unrealised capital gains.
It is likely to have an overweight impact on investments in the agriculture sector, though once again, the impact on brokered residential and commercial deals will be highly limited.
“It comes back to the fact that it’s not the SMSF balance, but the individual’s super holdings over $3 million (that will be impacted),” said Chesworth.
“The reason I stress that,” he said, “is that I’ve had some key people in the industry come to me wondering what’s going to happen to funds over $3 million. But that’s not the measure; it’s the individual balance.”
Point taken.
It sounds like Chesworth is optimistic that Chalmers’ super tax proposals shouldn’t be keeping brokers and their clients up at night.
Getting the right guidance
“I think there's an expectation that something will come out of this,” Chesworth said. “What its exact formal form will be, I'm not in a position to say. But in the broader SMSF borrowing business, there will be little impact, particularly in the resi space."
There’s one more point to be made here. Property investors buying multi-million-dollar properties that theoretically would be captured by the 30% tax band simply aren’t investing through an SMSF.
“Negative gearing in a low-tax environment doesn’t work, so people trying to buy multi-million-dollars of resi properties aren’t doing that through an SMSF – it just doesn’t stack up, particularly if it’s negatively geared,” said Chesworth.
At the end of the day, super tax is a complex world that requires the right guidance from the right expert.
On that note, Chesworth said: “I think that’s where customers need to go and seek appropriate advice, and brokers should be directing customers to the appropriate advice channels.”
Does he believe there is an argument to get rid of some of the regulatory barriers that prohibit mortgage brokers from providing financial advice?
“A mortgage broker is a key piece in the puzzle for a customer, but they're not the only piece and it's about working together with other licensed professionals, with a planner, with an accountant, with a solicitor," he said.
“It's very much linking in with a financial planner and an accountant and assisting customers with their needs and working together to a solution because everyone brings value to that relationship."
