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Welcome to Firstlinks Edition 334

  •   27 November 2019
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Two reports this week confirm that superannuation will remain at the forefront of social, business and political debate forever. Deloittes issued an estimate that super assets will grow from the current $3 trillion to $10 trillion over the next 20 years, and super funds will become so large that they will own most of the listed assets in Australia. Such massive power and influence will create policy conflict, and Westpac's Brian Hartzer and Lindsay Maxsted learned this week that the super funds are already the integrity gatekeepers. Maxsted intended to tough it out until told otherwise by the big investors and their agents.

Then the Retirement Income Review released its Consultation Paper. The Review is supposed to deliver only a 'fact base' as if somehow a neutral document will settle the arguments. However, one chart shows the so-called 'facts' will lead to policy changes, if not in this parliamentary term, then the next. The Review says:

"The overall level of public support provided by the retirement income system should be targeted to those who need it most."

The chart shows the opposite: the most government support in retirement goes to the wealthiest.

Lifetime government support provided through the retirement income system

But the Review must not focus only on superannuation. There is an equally-revealing chart showing that in every age group except the youngest, the largest asset is owner occupied dwellings. This does not include investment properties, these are homes lived in by the owner.

Average net Australian household wealth by age group, 2017-2018

With over 10 million residential buildings in Australia representing half the wealth of households, Rafal Chomik and Sophie Yan of CEPAR examine housing and ageing, and how renting can compromise a comfortable retirement for some people.

Still on housing, economist Diana Mousina shows how much prices have risen in recent months and why it has happened, and she checks the possibility of reintroduction of prudential controls. Then Stephen Hayes reports on an overseas trend Australia has been slow to adopt, of institutions building excellent rental accommodation to meet changing lifestyles and affordability.

Max Cappetta explains quant investing and how it sits in portfolios alongside fundamental styles, while Conrad Saldanha shows why passive or index investing does not work in all markets, with a focus on emerging markets equities. Index ETFs are good structures in the right market but it's worth checking the horses for courses.

Back on the influence of investors in company decisions, Fiona Balzer says retail investors can have a strong impact when combined together in the right type of proxy voting.

And it's that time of month when Jonathan Rochford provides his quirky but revealing look at the news you might have missed. Always something fascinating in here worth knowing.

This week's White Paper is Vanguard's economic and market outlook for 2020, with subdued expectations on the back of heightened levels of uncertainty and fully-valued markets. And as usual, our Education Centre has the latest reports on ETFs, LICs and listed investments.


Graham Hand, Managing Editor

For a PDF version of this week’s newsletter articles, click here.


November 29, 2019

(Repeat post)

I seem to recall that many years ago, when super commenced, that contributions were tax free and the earnings within the super fund was also tax free.

I have an issue with the graph
Lifetime government support provided through the retirement income system

and in particular the part dealing with contributions and earnings tax concessions. I suggest that the problem of super tax concessions can be attributed solely to peter Costello when he made pensions from a super fund tax free.

Under the initial system (super funds didn't pay any tax on earnings or contributions) the member of the super fund paid income tax on the pension that was drawn from the super fund.

effectively, if you put money into super, you didn't pay any income tax that year, but when you withdrew the money from the super fund (ie drew a pension) you were then taxed on the income received. putting money into super was therefore not a tax reduction scheme, but rather a tax deferral scheme.

then paul keating changed things. he put a 15% tax on contributions and a 15% tax on super fund earnings. BUT, when you drew a pension from the super fund, you were taxed on the income, but you got a 15% tax rebate on that income (the 15% number is no coincidence, the super fund paid 15% tax on contributions it received, and its earnings, but when the member was paid the pension that came back to him).

It was sort of a withholding tax - keating obviously needed to improve the budget bottom line, and getting 15% off the super fund did that (in that year) but the government would pay for it later (when the super fund started to pay a pension) because the income generated from the pension would be taxed effectively 15% lower than ordinary income. The government got the money now, and gave it back later. Sounds a bit like the franking system that keating also introduced, company pays 30% now, but when it pays out a dividend, then the individual pays tax on the whole dividend (grossed up) but then gets a rebate for the 30% that the company had already paid - effectively, if you ignore timing, the company pays zero tax.

The next big change to the super taxation system was Costello. he made pensions from super funds tax free. Now for someone who drew a pension of about $40k it made no difference to their tax at all. Marginal tax rate for the individual was 16.5% (including medicare) and they got a rebate of 15%, so effectively zero tax. But for a person who was on a high income (and MTR) they used to pay tax at their rate (say 46.5%) less the 15% rebate, so when Costello made super pensions tax he gave nothing to the low value super pension account holders, but a lot to the high value ones.

if the government were to reverse The Costello tax free super pension change, and started taxing pensions again (less the 15% pension rebate) then all of the problems of tax concessions would be eliminated. High income earners would still get a bit benefit in the short term (paying only 15% contributions tax instead of their MTR) but would pay for it later when then started drawing a super pension. By reversing the Costello change, all that super would do is postpone a tax payment (by evening out income over a lifetime rather than just over a working life). Its not too far distant from what farmers can do with income equalisation.

hope these thoughts are helpful. happy to discuss further if you wish

November 28, 2019

I'd love to see all the assumptions behind that first chart, for example, does it include tax paid on super contributions, where non-concessionals are after 45% tax.


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