SMSF ‘golden age’ over: Credit Suisse

A tax hit of up to $700m to self-managed funds will affect demand for equities, Credit Suisse says.

The “golden age” for self-managed super funds is over on the back of last month’s Federal Budget, which could provide a tax hit of $700 million a year from 2017, according to analysts at Credit Suisse.

It follows Treasurer Scott Morrison’s May proposal of the biggest shake-up to the superannuation sector in a decade, with stricter limits on non-concessional cap contributions, a reduction in the annual concessional cap for over 50s, a new $1.6m limit of the balance brought into the pension phase and a higher tax rate for super contributions made by those earning over $250,000 per annum.

In the eyes of Credit Suisse the SMSF sector will be the hardest hit, with growth in the asset base tipped to slow sharply as hundreds of millions of dollars are seized by tax authorities.

“The proposed changes are set to be yet another headwind for SMSF growth,” analysts headed by Hasan Tevfik said.

“’Selfies’ grew their asset base by 15 per cent per annum over the last 12 years and we expect this to slow to 2 per cent per annum by 2020.”

Currently, self-managed funds have $590 billion under management, with that number stalling over the past 12 months after years of rampant growth.

The SMSF space represents the most significant component of the nation’s overall super pool, with a 29 per cent share.

The prospect of the Australian Taxation Office increasing its take from the sector in coming years will have many and varied effects, including the prospect of greater risk-taking in a bid to compensate for higher taxes with higher returns.

“Our recent discussions with SMSF advisors reveal that many expect their clients to take on more risk and Aussie equities are forecast to be a bigger share of a slower growing SMSF pool,” Credit Suisse said, adding the advisors thought the new rules were largely “fair”.

As it stands around 39 per cent of SMSF holdings are believed to be in local stocks, with the remainder largely tied up in either cash or Australian property.

Such is their influence on the local market, SMSFs are believed to own around 16 per cent of the $1.47 trillion local sharemarket.

On the surface a fresh tax hit – coming in as high as $700m a year – could wipe $600m worth of demand from SMSFs in local equities, according to Credit Suisse, but this doesn’t take into account a likely shift in the thinking of self-managed fund owners.

“We estimate the super changes will result in SMSFs paying an additional $600-700m per annum to the taxman,” the report read.

“We calculate they need to switch $15bn out of cash into equities just to keep the post-tax yield on their fund constant.

“While a switch of this size is unlikely to happen overnight, it does make it clear which way equity allocations are set to go. If ‘Selfies’ want to generate enough income to fund their retirement, they will have to take on more risk.”

Credit Suisse believes future self-funded retirees will look to high-yield growth stocks to dominate their portfolio, with the likes of Adelaide Brighton, AGL, Asaleo and Boral seen among the potential beneficiaries of a SMSF sector more heavily engaged in the Australian sharemarket.

The analysis comes as the Turnbull Government looks to head off a revolt from Liberal Party members over super changes, particularly in Julie Bishop’s safe WA seat of Curtin.