SMSF – Speculatively Manipulated Skiing Fiesta

by on February 8, 2013

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[Skiing and snowfields, c. 1930s, by Sam Hood

That’s what the locked out generations may well name Self Manged Super Funds in time. With all the talk about superannuation reform coming out of Canberra, we thought it timely to ask why the latest in speculative subsidies isn’t under review?

The ability to buy residential real estate with a capital gains exemption via a SMSF came in around 2010, just as the FHOG’s (first home owner grants) were being wound back. Policy makers must be commended for being more direct in their subsidy this time – giving it straight to those who are over 55 and have $200K in super savings. The FHOG was not such a direct subsidy – whilst the money was given to first home owners, the added purchasing capacity meant that it was the sellers who benefited from the new higher selling price.

As if negative gearing wasn’t enough of a boomer subsidy (totaling $33 billion in write offs since 1993), young people will be wondering if there is a place on this earth for them once the extent of SMSF subsidies mounts. Will the electorate connect the dots between the decade long housing crisis and another tax handout to those who already own property, the tax free status of residential (and commercial) property investment for SMSF’s in their pension phase?

In terms of stability, to have $400bn in SMSF’s and probably half that into property is risk personified. The Melbourne apartment glut has certainly benefited. Such a war chest equates to 363,000 properties (at the average $550K) being snavelled up by those who already own 47% of housing wealth.

Swan tried to reform this loophole pre the MYEFO but the lobbyists must have shredded him with another threat of a marginal seats campaign (a la the miners, pokies & taxi licence owners in Vic). Is that you saying “Relax – it’s just rent seekers maintaining barriers to entry to underwrite the Veil and Aspen ski trips of those in the know”?

When the MYEFO was announced, the AFR wrote in an article headlined SMSF’s dodge Swan’s budget bullet:

Mr Swan appeared to have self-managed super funds in his sights, particularly those that own property….

Later in the article, we see how lobbyists turned it around:

Overturning a draft ruling made by the Tax Office last year, the government announced that the pension of a person who dies will only cease to be a pension when all the death benefits are paid to beneficiaries.

This means that the savings of a person who dies will remain in the pension phase until all the assets have been transferred or sold – without being subject to capital gains or income tax.

Brad Eppingstall, (RSM Bird Cameron) said “This change to the tax law will make the investment by an SMSF in property more attractive,” he said.

“The concern with investing in property under the draft ruling was that there was potential for significant capital gains tax to be payable on the death of a member, especially where the property had been owned for an extended period of time with significant increase in the value of the property.”

In terms of the real estate 4 ransom mentality, this means that beneficiaries can hold a property empty until they get their desired price.

Is it any wonder that SMSF’s have been growing at such an exponential rate?

4 Comments

  1. May Hem08-02-2013

    gosh, does that mean that the beneficiaries of any elderly SMSF people might be tempted to ‘help’ them kick the bucket?

    some property speculators will do anything to avoid taxes and improve profits! they are generally people with little compassion for others.

  2. THEO10-02-2013

    I believe the voter generally holds most f the responsibility for the high land and house prices in Australia. By voting they give approval to governments spending billions of our taxes to favouring and supporting a minority groups like home investors. As protest, people should instead place a list of their complaints instead of candidate preferences when it comes time to voting again.

  3. Aussie14-02-2013

    This really frustrates me – the attitude of this article. Taking less tax or having a lower rate of tax is not a subsidy. It’s easy to start a SMSF. Start your own SMSF and save for your retirement rather than just whinge about others who have taken on that responsibility.

  4. Bobby Fischer19-02-2013

    Good article Karl. No-one else has really pointed out this bad federal policy in much detail.

    Aussie said: “This really frustrates me – the attitude of this article. Taking less tax or having a lower rate of tax is not a subsidy. It’s easy to start a SMSF. Start your own SMSF and save for your retirement rather than just whinge about others who have taken on that responsibility.”

    In the real world Aussie, what happens is tax reductions in one place leads to the increase of taxes in another or the equivalent removal of a subsidy (the effect is the same). So, in effect by subsidizing the investment decision of baby boomers via capital gains tax exemptions, this will lead to:

    a) government balancing the ledger elsewhere – typically the less well off lose benefits or a public subsidy is withdrawn e.g. from public transport, making fares higher for everyone

    b) further 100s of billions will be piled into USELESS PONZI ASSETS in the form of highly over-valued residential property, which is really just an already very inflated land bubble – heightening the risk of future financial instability. This means when it all caves in eventually, all the more ponzi credit will be liquidated, because properties bear no sensible relationship to rents, average household incomes etc. Further, banking stress will increase in light of high levels of bad and souring debts due to high levels of mal-investment.

    End result:

    1. The disadvantaged are worse off;
    2. Baby boomers who already own half of all properties get a further sweet investment deal (funny how many BBers are in politics currently with investment properties, no?);
    3. Loads more ponzi credit is extended which will eventually be liquidated when the land bubble further deflates, making the subsequent economic downturn all the worse; and
    4.A ton of good government money is thrown after bad into the property ponzi. Isn’t NG, CG tax exemptions comprising 10s of billions a year already enough!?

    Just think what sensible policy could achieve Aussie: low cost housing – leading to much higher productivity as the key cost of doing business and living expenses are driven to the floor; meaning capital is freed up for sensible enterprises that grow real economic output in a sustainable manner. Further, those 10s of billions wasted on subsidizing property investment could be used for public infrastructure e.g. high speed rail, paid for NBN etc which all adds to long term productivity growth.

    Also, young people would not be frustrated by their inability to enter the housing market as house prices would approximate 3 – 4 times median household income e.g. homes for 200 – 300K, not this over-inflated ponzi crap we see today with normal home prices at least twice their real long term average.

    You have to remember Aussie that property is simply a depreciating dead consumption asset on a tiny bit of land of which Australia has abundance. There is no logical reason for house prices to either be high or to grow in value at a rate consistently above inflation. Long term trends in Europe and in the US exhibit house price growth over hundreds of years which approximates inflation.

    When the credit bubble bursts, and it will burst my dear Aussie, it will simply be devastating to Australian household worth as where decelerating credit growth goes, house prices doth follow. And Aussies have all their dosh tied up in bricks and mortar, because they all collectively believed the propaganda that “you can’t lose on bricks and mortar” & “housing doubles every 7 – 10 years”: both truisms that are about to be spanked, very, very hard.

    What did you say Aussie? Didn’t the RBA tell you about previous credit and property bubbles in Australia’s boom-bust asset economic history Aussie? My, my, that is quite the oversight don’t you think? Almost like negligence by omission.

    Conclusion: Do your homework Aussie and don’t be fooled into throwing your life savings away into an SMSF loaded with property, otherwise there is a good chance you and your cohort will be a footnote in history under – “The almighty residential property implosion of the early 21st century in Australia”.

    The chumps who believe the hype are likely to get burnt in accordance with herd/speculator theory which has repeated throughout history.

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