Investing in super like shooting at a moving target with more financial advisors to be needed

Investing in supposedly one of the world’s best super systems is now like shooting at a moving target. Tell your kids it might have worked for you, but it’s not going to work for them.

Inflation will eat away at the value of the $3m super balance cap, meaning savings of younger generations will be impacted more heavily.

Everybody expected Treasurer Jim Chalmers would move to limit large amounts held in super. But nobody for one moment imagined the hamfisted policy move announced without consultation this week.

Politically, this was low-hanging fruit – who is going to march in the streets for anyone with more than $3m in super?

It should have been an easy win. The government could trim back benefits for older Australians and balance the move with better terms for younger investors.

But in trying to be too clever by half with a poorly conceived plan that was rush-released midweek, the move could backfire. In essence, the terms of investing in the super system are no longer reliable.

As for where the money goes that is set to bolt from the system, well if you think there is a fair bit of renovation work on family homes in your neighbourhood, you ain’t seen nothing yet.

Older wealthier Australians will now be seeking alternative tax breaks, while younger Australians would be misled if a financial adviser were to tell them super is the single best place for savings.

Ironically, the new measure, in itself, is clearcut. Super savings are not taxed up to $1.7m. Until now amounts over $1.7m could be kept in the super system but there is a tax of 15 per cent – and the amount you can have in total in the system is unlimited.

The government has chosen not to put a hard cap on the system, instead it went for a ‘soft cap’ – that is an extra tax. Under the plan, amounts in the system over $3m will now be taxed at 30 per cent and it remains unlimited.

But you don’t have to be an accountant to work out that applying this change is going to be a nightmare. The existing system is already held together by a string of random initiatives from both sides of parliament.

Without going near the unimaginable complications of transfer balances, not to mention defined benefit pensions, let’s just pose a simple question: How much can you plan to put into super – will the current menu of caps change in the future?

Well, for a start there are now three ways those different caps can change.

Contribution caps: The amount you can put into super pre-tax each year is set by changes to wage inflation. It is $27,500 now.

Tax free limits: The amount you can have in the system in the tax free limit cap is set by changes to consumer price inflation. It is $1.7m now.

The new 30 per cent cap will not be indexed: This is a screamer: We’re talking “bracket creep” on steroids.

Don Hamson who runs Plato Investment Management has calculated that if inflation ran for 4 per cent for the next 30 years (and keep in mind its nearly twice that level just now) then in three decades time the equivalent to the $3m cap would be $925,000 in today’s money.

“Inflation will mean that many, many more individuals will be hit by this cap in the future,” says Hamson.

To put this another way, tell your kids that super worked for you but it’s not going to work for them.

It gets worse. Having created three levels of tax in super – and three variations of indexation – the government is also going to assess tax in a different way for those who have more than $3m in super.

The capital gains free family homes and renovations are likely to be popular.

Targeting that band of investors the government plans to tax unrealised gains – that is the amount the tax office deems you have made even if you have not made it. Such a move throws all tax principles out the window.

Investors will now plan to leave the system or engineer their portfolios to ‘get back under’ the new cap, that’s why there is talk of forced sale of shares and property.

In fact, Self Managed Super Fund operators are going to find they are singled out for special treatment because of the illiquid nature of property holdings. As we’ve said here before, you can’t sell a bedroom.

We have been here before in the franking credits saga which helped the ALP lose the 2019 election. It works on the basis that you can single out one group for special tax treatment. The problem is that instead of upsetting thousands of people you trigger unease among millions.

A moving target

What will investors do now? A soft cap means money will not be expelled from the system by the new rules, but don‘t worry it will move out of its own accord seeking the other tax shelters we have in the system.

As one regular reader Helen McCarthy put it “with no capital gains tax on homes this will inject even more into completely non-productive ever larger CGT-free mansions.”

For sure Helen.

Investors will also turn to:

Negative gearing remains a powerful tax break for those willing to take risk on property. The volume of activity is subdued just now due to falling house prices, it will not stay that way for long.

Franked dividends on blue chip shares will be more attractive than ever. Of course there are also plans to stop companies from paying fully franked dividends from the proceeds of capital raising.

At the upper end of the market, family trusts will have a revival, especially now that the tax office has lost court actions that would have led to tighter rules.

Just watch a new sector flourish that sells the merits of money held outside super.

The standout here is investment bonds where you can have money taxed at 30 per cent with the money coming back tax paid if you hold them for a decade. As investment products they are far from perfect. But guess what? They have the same headline tax rate as the new top band in super and you don’t have to wait until you retire to reap the rewards.

Long term savings deserve long term stability. What we are witnessing now is the exact opposite. It makes a complex system even more complex. The big winners here will tax specialists and financial advisers. In fact, since there is barely enough of them to go around, perhaps the government should accompany the change with a global recruitment drive for super specialists – there’s going to a load of work to do in what is supposed to be one of the world’s best super systems.

As Tony Negline of Chartered Accountants Australia and New Zealand suggests: “Investing in super in this country is like trying to shoot a moving target. How can we ask people to invest in super when you don’t know what rules will apply by the time people need to access their money?”

These are just the first batch of unintended consequences emerging from the planned changes to super. Either the government blundered or it already intends to amend this plan, betting that investors will be so relieved they will take it on the chin.

But it’s already too late, super is not what it used to be.

Originally published as Investing in super like shooting at a moving target with more financial advisors to be needed