Summary: I think the tax-free status of superannuation funds in pension mode is going to change. Meanwhile, Macquarie has projected that population growth will slow and dwelling prices will fall, which would lead to lower interest rates and likely a lower share market. It is possible that negative gearing will be extensively modified.
Key take-out: Whether we like it or not everything is going to be put on the tax table as part of this current review and new Treasurer Scott Morrison is preparing Australians for some big cuts in government spending.
Key beneficiaries: General investors. Category: Superannuation, residential property.
Bubbling not far below the surface is the potential of enormous change in Australian taxation and investment trends. The Turnbull Government has put everything on the table.
These days we tend to focus on the sharp fluctuations in our share market but they can obscure the fundamental changes that are now set to take place following the change in prime minister.
If we needed a clear signal, then it came in the form of an enormous back down by the government on independent contracting. In the Abbott regime the cabinet had buckled to the lobbying of the 7-Eleven and the Business Council and reneged on their promise to extend the consumer fair contract protection to small business contracts with large organisations where there is no negotiation and the contracts are a standard form.
The new Small Business Minister Kelly O’Dwyer has changed course and embraced the Senate amendment which now states that one year standard form contracts under $300,000 must be fair. That is going to require most of our top companies to change the way they contract with independent contractors. It will be an enormous benefit to the independent contractors but will also help the companies as it will force them to relate to the people they deal with and increase their productivity.
But if the government is prepared to change policy on fair contracts how much more likely are they to change the taxation of investment? What will their stance be on population increases, which are set to be vital to dwelling prices?
Looming super changes
I don’t think there is any doubt that the tax-free status of superannuation funds in pension mode is going to change. If we go back just over two years I was an advocate of taking the legislation put forward by the then assistant treasurer, Bill Shorten. He proposed that in superannuation funds in pension mode the first $100,000 income per person (indexed) be tax free and the rest of the income from superannuation funds in pension mode be taxed at 15 per cent. Obviously I preferred the existing tax-free pension mode superannuation income but my fear was that if that proposal was not accepted the next one would be worse.
Unfortunately in the early days of the Abbott ministry Arthur Sinodinos (who has now been elevated once again to be cabinet secretary to PM Malcolm Turnbull) knocked back the Shorten plan and while all those superannuation funds in pension mode have enjoyed tax-free income, the next tax plan is not going to be nearly as favourable. My fears are being realised.
In my opinion the best we can hope is that some of the income of superannuation funds in pension mode will be tax free and the rest taxed at 15 per cent. Bill Shorten’s current plan of $75,000 income per person tax free is probably the best we can expect. It might be much worse. There may be some very different system involving assets rather than income which will amount to the same thing.
Naturally I hope I am wrong but all those with superannuation funds in pension mode who are making long-term commitments on the pensions they receive need to be aware of the looming superannuation tax change. It is possible that it will be delayed until after the 2016 election. When the proposals come on the table I will comment on them.
Predicting a fall in house prices
One of the pillars that has been embraced by both major parties for decades is that Australia should have a higher population. That pillar is now being challenged and this week Macquarie announced that its housing monitor index was predicting a 7.5 per cent fall in dwelling prices starting in 2016.
There are a lot of inputs into the index including affordability but one of the biggest single factors in the predicted house price fall is the Macquarie projection that our population growth will slow considerably. This will create dwelling surpluses in some areas, particularly in inner city apartments.
Macquarie goes a step further and says the price decline will also slow the rate of building and that lower building rate will be converted into lower demand for appliance retailers and building suppliers. This demand has been an important driver of the economy in the wake of the decline in mining investment. The demand has been concentrated on Sydney and Melbourne because Chinese and other Asian investors have invested in those cities ahead of population growth. Although, important cities like Brisbane have not been major participants.
And, of course, Macquarie is right and if population growth stalls in 2016 causing less building and dwelling prices to dip then that that will affect the economy and lead to lower interest rates. I would also add that it will almost certainly lead to a lower share market and lower Australian dollar. This will not be good news in an election year.
My guess is that once these trends start to happen and politicians begin to understand why they are happening they will let more people come into Australia. We have a fantastic source of migrants in young people who are educated in Australia who have come to understand who we are and how we do things and want citizenship. At the moment we are making that transition from being a student to being a citizen difficult. But if our population growth and economy start to dip then once politicians understand the situation there is a good chance they will let more people come in.
But the politics may be difficult and I know many Eureka Report readers believe we should restrict our population increases and I respect that view. But my view is that the high population growth has been a big boost to the economy and is making us better prepared for the time when baby boomers no longer work.
But leaving aside the different views on what is a controversial subject we need to watch population growth in the year ahead because if it stalls as Macquarie is predicting then it will have considerable implication for most avenues of investment.
Preparing for political changes
Why are retirees who have worked and paid tax all their life now in the social gun?
As you may know I have a strong view that our younger generation – those in their late 20s and 30s – are becoming very frustrated because they can no longer buy a house. And these young people dominate print, television, radio and social media – they control the “air waves”. Unless we bring them into our tent older people will stay in the gun. It has nothing to do with fairness.
I would like to see the first $50,000 in first home buyers’ superannuation being available for a deposit for a dwelling. It can even be allocated ahead of being contributed. If that is done in isolation the price of dwellings will simply rise by $50,000 (and cause Macquarie to be wrong). But it could be managed with a modification to the negative gearing rules which is one of the areas that is now on the tax negotiating table.
In the looming tax negotiating free-for-all it is possible that negative gearing will be extensively modified which will bring on a dwelling price fall irrespective of population growth. Once young people become part of the home owning culture and see superannuation as a short- and long-term asset then superannuation is more likely to be protected.
And, again, whether we like it or not everything is going to be put on the tax table as part of this current review and new Treasurer Scott Morrison is also preparing Australians for some big cuts in government expenditure. We saw in the refugee area that Morrison is a very determined and capable minister. He can take heavy flak but does listen.
All this comes at a time when most companies are not going to gain significant rises in revenues. While there will be some situations where this will occur, profits will come from lower costs and new markets. Taken in totality it is a world we haven’t seen before.