Three super challenges for Sinodinos

New superannuation minister Arthur Sinodinos has three key decisions.

Summary: Arthur Sinodinos, the new Minister for Superannuation, needs to determine how the Coalition will handle the former government’s proposed superannuation tax changes, particularly plans to tax those in pension mode earning above $100,000. Another key area is ensuring that Australia’s self-managed super sector is not adversely impacted as a result of efforts by the big funds to win back market share.
Key take-out: The new federal government should focus on making any tax changes fairer and administratively possible.
Key beneficiaries: SMSF trustees and superannuation accountholders. Category: Superannuation.

The new Minister for Superannuation, Arthur Sinodinos, has three important decisions to make that have the potential to affect a great many Eureka readers.

But first I want to look at the skills of Minister Sinodinos, and then set out his three key decisions and how he might tackle them.

Arthur Sinodinos rose through the federal public service, working both in the Department of Finance and Treasury. He was then appointed chief of staff by former prime minister, John Howard, a position he occupied from 1997 to 2006. Sinodinos was not the most innovative policy thinker, but he was a ‘can do’ operator.

A great deal of the credit for the success of John Howard can be attributed to the practical work and the attention to detail of Sinodinos. Indeed, when Sinodinos left the Howard ministry in 2006, the former prime minister dropped several notches in overall effectiveness, which ultimately contributed to his defeat in the 2007 election at the hands of Kevin Rudd.

Sinodinos went on to work with investment bank Goldman Sachs JBWere and National Australia Bank. But his great love was politics and he became a senator, replacing Helen Coonan. Sinodinos managed to get re-elected to the Senate in the last election.

  1. The pension income decision

Sinodinos’s first major decision now is how to handle the former government’s proposed superannuation pension mode tax rises. In the latest election campaign, the Coalition made it clear it would accept all of the ALP’s tax-raising measures, except the fringe benefits tax change on motor vehicle leases and the carbon tax. That means the new Government has taken into its forward estimates the ALP’s planned tax on superannuation income for individuals in pension mode earning more than $100,000.

You will remember that in the dying months of the Gillard government, Treasury made a push to tax superannuation at a much higher level. And it based that push on a series of mathematically incorrect reports, which were complete rubbish in terms of calculating the so-called subsidy on superannuation. Once I pointed this out, the Cabinet had no Treasury data it could rely on, so it turned to Eureka Report and used my sums to calculate their policy. It was without precedent in recent history.

What I had pointed out was that to get $100,000 income based on a 5% return, you needed $2 million in a fund. Taxing funds with less than $2 million in them was grossly unfair, as they could not adequately fund a retirement; and government will save vast sums on Centrelink pensions if people are able to fund their own retirement.

What the former Superannuation Minister Bill Shorten did was to first use my sums and then turn them on their head, and he used $100,000 in income rather than the asset level as the base for taxation.

So if a person earns more than $100,000 in income from their pension mode superannuation fund (or funds), then that amount would be taxed at 15%.

Or at least that was the former government’s proposal. It has never actually been enacted. The problem that Sinodinos faces is that to manage such legislation would be an administrative nightmare. The industry and private funds simply don’t have that income data available, and they would need to introduce highly expensive procedures to obtain that data to organise the tax for what is a relatively small amount of their membership base (those in pension mode earning more than $100,000 in income).

Strangely, it would be much easier to manage in a self-managed super fund (SMSF) because the beneficiaries can make the calculation easily. But the problem with SMSFs is that often there is a property or major investment that has been sold, and a very high profit may be generated in a particular year. That artificially distorts the tax in any one particular year. Remembering that Sinodinos is a person who loves organising the detail, he may try to raise exactly the same amount of money by going back to my original sums and basing the tax on the proportion of a fund (or funds) that exceed $2 million. But whatever way it is done, it must be simple. Naturally, I prefer there was no tax at all and that the current situation remains. But if there is to be a tax, it needs to be calculated another way. The Shorten proposal had many attractions, but it would have been an nightmare to administer.

  1. The gearing boom decision

The second decision Sinodinos faces is the boom in the gearing of SMSFs into buying real estate investment properties. As I have been writing in Eureka Report for some time, handled in the right way this can be a very effective way for younger people to gain an investment house and pay it off with tax deductible dollars. It is particularly useful for people job require travel and overseas/interstate locations. They can have equity in a house for use in their retirement, but don’t live in it. However, I fear the real estate agents are getting into this business in a most unfortunate way and there will be a lot of abuses. The Reserve Bank is urging action in this area because it can see the danger of a housing bubble. Arthur Sinodinos will almost certainly tackle this. For some time my advice to Eureka readers has been that if you want to undertake this superannuation investment practice do so now, as I am not sure how long it will continue.

  1. The self-managed super fund decision

The third area he must tackle is the blasts to SMSFs that occur after every election, and every time there is a new minister. Institutions generally organise campaigns, sometimes with the encouragement of government regulators who work with the big funds, but not with the SMSF sector. One way or the other, pressure is placed on an inexperienced minister to act against SMSFs before he or she understands the issues.

There is a volley of criticism directed at SMSFs. Most of it is complete nonsense and is generated by the big institutions, which are furious they have lost so much market share to SMSFs. Indeed, SMSFs have more than 31% of the superannuation market and 50% of people in the pension mode market. Collectively they are larger than the industry and private funds that are ‘killing’ all sectors of the superannuation movement. And there is no secret to their success – they are a far more efficient way of operating superannuation funds.

The ‘official industry’ simply became too costly, paying out fat salaries and commissions. What the accountancy profession did was to develop a system of superannuation at low cost.

Part of the nonsense that is spoken about SMSFs is that you need $500,000 to economically run a self-managed fund. I can’t think of anything more silly. You do need at least $100,000 to make it economic, and probably $200,000 is a better figure. And that is simply on the basis that it costs about $1,000 a year to run a simple fund – that makes it 0.5% of assets with $200,000 in assets.

The accountants have made it so easy to do, and investing in a base portfolio is not a difficult process, as I have explained in Eureka many times. If you want to do things more aggressively then that is a different situation.

Arthur Sinodinos will be smart enough to know that he is now dealing with the biggest superannuation movement in the country, and a great many of the SMSF beneficiaries are Coalition supporters. Instead of sprouting falsehoods, the big funds have to develop products for SMSFs and market those products at competitive fee rates. They have yet to do this.

I was debating the issue with a medium-sized fund manager last week, who explained he had a SMSF product division. But it was clear he hated SMSFs with a passion – in other words, he hated his potential customers. He has no hope of success. There will always be abuses in small, big or medium-sized funds, self-managed or otherwise, but overall the SMSF movement has managed itself very well and returns in self-managed funds are matching those in the professional managed funds.

And they are helped by the lower costs and the sort of advice coming from Eureka Report.

The Sinodinos challenges

So Arthur Sinodinos, if you want to be a hero among a large part of middle Australia, make Bill Shorten’s tax fairer and administratively possible – but no more onerous.

Don’t be snowed by the big funds, which have for decades tried to get superannuation ministers to act against SMSFs purely because they wanted to continue to bask in large fees.

And we may have some abuses in the current real estate scramble, but remember that for a large number of people – particularly those who are mobile – real estate is an excellent superannuation investment.

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