Watch this investment cocktail

It will take time for superannuation changes to truly take shape, but in the mean time we should have eyes on China.

Summary: While many individuals race off to financial advisors in light of the 2016 budget’s proposed super changes, I suggest that people wait it out. There is a lot of detail to be fleshed out in the actual legislation. Meanwhile, changes in the way Australian banks are lending to overseas buyers could mean that in the long term, those from China and other parts of Asia that have purchased off the plan apartments might not be able to honour those payments.

Key take out: Australia’s economic future relies on an assumption that China will muddle through yet remain relatively stable – however, levels of debt in the country are of concern.

Key beneficiaries: General investors.  Category: Economy.

A great many superannuation investors are racing off to their financial advisor seeking strategies to adapt to either the Morrison or Shorten superannuation proposals. Unless it is a very urgent matter I would urge everyone in the superannuation movement to wait, because in my view no matter which party gets to power on July 2, the final superannuation outcome may be somewhat different to what is currently being proposed.

Of far more longer-term importance are the important developments in China that are being reflected here in Australia. I will return to that subject later.

Super changes will be a long game

During the week I was yarning to people in the Coalition’s political advisory community and it became apparent that on the government side the detail of how their $1.6 million accumulation fund providing tax-free income in pension mode would actually work has not been finally decided. One of the reasons the measure doesn’t cut in until July 1 2017 is to give the new government, assuming it is the Coalition, time to fine tune the proposal.

On the other side the Shorten proposal of a 15 per cent tax on superannuation income above $75,000 is causing all sorts of problems in the APRA-regulated large pooled superannuation funds. It is an easy calculation for self-managed funds but the APRA funds do not have the systems in place for the calculations that the Shorten plan requires.

Add to that a Senate that is almost certain to have more independents than the previous Parliament and we have an investment cocktail that is clearly not yet complete. (There are some things to think about, however, regardless of which changes do come in - you can read some suggestions from Bruce Brammall in his piece today - click here to read more: Super strategies to use now.)

In that context I want to pick out two letters I received this week. One is from Ian and the other from Simon (their real Christian names). Both take the view that both the Shorten and Morrison plans are manageable and indeed for those with larger sums in superannuation, probably fair. The Morrison plan is better than the Shorten plan when it comes to taxing plans in pension mode.

I have put both letters at the bottom of my commentary but I want to quote Simon on the relative merits of each of the proposals. It should be underlined that Simon and his wife have large sums in superannuation ($2m each) and that whereas the Shorten proposal is based on an unindexed $75,000 trigger point which will gradually fall over time, the Morrison proposal has the $1.6 million asset trigger indexed so over time it will be much less onerous than that proposed by Shorten.

Simon: “Shorten would tax the pension north of $75k per year.

I have done the math. Shorten would cost my wife and I at least twice as much as the Budget would. I could live with that too. My wife and I get to keep 85% of our pensions above $75,000. What is much more damaging is what happens when one of us dies, or both, or we want to help one or more of our kids. Under the Budget if we [and our helpers when we are infirm] are agile all these objectives can be met tax free. Under Shorten even if his tax is only 15% the result if dramatically worse. With no way out. Who is to say the tax rate will not be marginal rates not a flat 15% tax?

Whose proposals are retrospective? Strictly neither. We could always pull all our money out of super tax-free and invest outside in the window both sides offer. However Shorten makes staying in super above his very modest tax free levels very dangerous. His successor or coalition partner might just increase the tax rate. Never mind that so doing taxes recovery of after tax contributions. Who would need a death tax?”

In my view, what really shocked the superannuation movement was the $500,000 lifetime contribution cap, which was clearly retrospective as it is dated back to 2007. It upset a great many retirement plans. Because I am 75 it does not affect me personally but frankly I think the Coalition plan needs to be amended although clearly there are no guarantees that it will change. Nevertheless if the $500,000 lifetime cap affects you badly it may be best to get your advisor to muddle through rather than make definitive adjustments now. I could be wrong but there is a good chance that when the proposal passes the Senate it will be different to what was in the budget.

Troubles ahead for Chinese property buyers?

And talking differences, two things are happening in the property market where everyone needs to take notice. The first is the proposal by the ALP to change the negative gearing rules and limit their application to new dwellings. Combined with lower interest rates this is causing a flurry of negative gearing activity. There has been an increase in demand from young Australians for apartments and my friends in the suburban house building industry say that in most centres demand in strong, although there is a softness in New South Wales.

Conversely we are seeing some disturbing news coming out of China where there is a difference at the top. Rowan Callick, The Australian's China correspondent, reports that confidence in China’s capacity to manage down its debt crisis has been eroded by a bizarre public exchange of statements by the country’s top leaders–Premier, Li Keqiang, who is in theory the second most powerful person in the country and the most powerful person the general secretary of the ruling Communist Party, President Xi Jinping.

As always in China, the differences are contained in press articles and other material, but they are appearing to blame each other for the mess caused by the mostly fruitless outlay of hundreds of billions of dollars or about 260 per cent of gross domestic product.

And debt is virtually universally identified by China-focused economists as the country’s main problem.

Given the level of Chinese debt, the delicate political situation is not good news for Australia because our economy is based on the belief that while China has problems it will muddle through. I think the conclusion remains intact, but divisions at the top increase the risk. I don’t know to what extent the problems in China are causing a big fall in Chinese demand for apartments in Sydney, which will then be felt in other states, but it is clearly a factor.

It is becoming difficult for the Chinese to get money out to Australia and that is coinciding with some really dangerous banking as we in fact impose a credit squeeze on the Chinese and other Asian investors that have bought apartments “off the plan”.

At this moment the price of most apartments that were purchased “off the plan” say 18 months ago is below the current market so financing is made easier. But that is not the case with the avalanche of recent purchases. There is a real danger that in one to two years developers will be left with a lot of apartments where Chinese and other Asian investors who bought “off the plan” simply can’t raise the funds to honour their commitment. I hope someone will talk sense to APRA and our banks because the Australian financial system, which includes banks and second mortgage lenders, have funded enormous apartment development but look like pulling the rug on the buyers that bought these apartments.

I can’t think of anything more dangerous, particularly as the Chinese are very important to our tourism and education industries. There will be no crisis for some time but this is a dangerous situation that we will need to watch very carefully in the weeks and months ahead and be assured I will keep Eureka readers posted.

And just finally as you know Eureka has been sold by News Corporation, and the new owners have asked me to continue to write for you each week as I have done for the last ten years. I enjoy our communications each week and I plan to stay on although I will be missing for about a month because we are visiting our son, his wife and two grandchildren in Newfoundland. But that is a few weeks away.

To read the two letters I refer to above, click here for our Letters to the Editor section: Eureka Report Correspondence (click here to read more).