(03) 9020 2905PORTFOLIO POINT: A “review” of super gearing in two years is as close to certainty as SMSF trustees could have hoped for.
Half full or half empty? Is a review of super gearing rules in two years’ time the end of borrowing in SMSFs, as some commentators suggest? Or is it the next best thing to certainty for SMSF trustees using the relatively new rules?
Plenty of commentators are already claiming gearing in super will be beheaded.
But I disagree. If you look at the wording of the government’s response – and assuming the words mean what they say and aren’t code for something completely different – then any potential disappearance of SMSF gearing is directly linked to the performance of Australia’s property markets over the next two years. And, to a lesser extent, the share market.
Recommendation 8.10 in Cooper’s review stated: “The 2007 relaxation of the borrowing provisions and the consumer protection measures that have recently been announced should be reviewed by government in two years’ time to ensure that borrowing has not become, and does not look like becoming, a significant focus of superannuation funds
The Government’s response was: “Support. The Government agrees with this recommendation. However, a broader review of leverage will be undertaken that includes all superannuation funds across the industry. Leverage poses a risk to superannuation fund assets in both SMSFs and APRA-regulated funds because it can magnify investment losses and reduce liquidity. The review will enable consideration of whether borrowing by superannuation funds has become excessive, placing fund assets at risk, and whether such investments should be permitted to continue.”
There are a few things to note about the government’s statement.
One: The only way investment losses can be magnified with gearing is when markets are falling. If markets are flat, then losses are likely to be relatively small (and limited to negative gearing). And if markets rise, then … it would be politically difficult to turn off the tap.
Two: Given that the ATO tweaked the rules in May this year to effectively narrow SMSF gearing to property and make it very difficult to gear into shares (because of the costs of setting up bare trusts and diversification), those wishing to see the end of gearing in super had best start praying for a US or European-style property crash.
Three: The government has said it wants the review to go a little wider than that and take in all gearing in super.
That would mean a review of the other (previously) existing gearing opportunities available to super fund members, which were fairly limited, but have been around for 20 or so years. There were really only three types – instalment warrants, share instalments and internally geared managed funds.
The use of instalment warrants and share instalments (such as the Telstra issues) were only available to SMSFs.
Internally geared managed funds, such as Colonial First State’s Geared Share Fund, are technically open to everyone. However, they are really only available on a limited number of retail super platforms.
As that’s the only real gearing that non-SMSFs can do, then it shouldn’t take up too much time during any inquiry. How many people are using the option inside retail super funds? Are they being used by the right people (that is, people with a high tolerance to risk)? And do we want to take a stance on it? The answers to those are “probably less than 1%”, “most likely” and “too political”.
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But two years? That’s giving SMSF trustees plenty of time. Which is a lot more than I thought would be the case.
In October and November, I wrote two columns about how gearing could be used in super to reduce tax in your super fund to zero (see columns on October 20 and November 17). The columns were essentially responses to Treasury Secretary Ken Henry’s claims in the Red Book given to the incoming Gillard Government that SMSFs were now a considerable source of taxation leakage. And a recommendation to close that loophole.
I had become increasingly convinced that the government would act to stop this sooner rather than later. As in, within months. But SMSFs now have some sort of certainty. If you want to gear into property at any time over the next 18-24 months, you should be okay.
The decision doesn’t mean that the government won’t clamp down on super gearing in other ways, but it makes it less likely. The Treasurer could still act on negative gearing in super in next year’s Budget, or at any time he sees fit.
If you were planning to make a plunge into a geared property, you have most likely got more time to consider your decision now.
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Close, but don’t light the cigars yet.
I suggested in June (9 June, 2010) that the average SMSF should hit the magic million mark in 2010. Well, we didn’t make it in the June or September quarters, largely thanks to equity markets being a little off the boil. And, we’d probably need the market to recover a few per cent between now and December 31 in order to get there this financial year.
The ATO stats to the end of September show the “average” super fund had nearly $940,000, marginally lower than the nearly $947,000 it stood at at the end of March. At the end of March, the ASX200 was sitting around 4900 points. At September 30, when the latest stats were compiled, the ASX200 was around 4400 points.
With the ASX200 market sitting at around 4800 points (Jamie: please check), there probably hasn’t been quite enough of a lift to get there, depending on contributions and the performance of other assets during the quarter. But it will be line ball.
But the miraculous growth in SMSFs continues, according to the latest Tax Office data. SMSFs topped $400 billion for the first time in the September quarter. This has grown from 36.5% since the bottom of the equities cycle in March 2009.
Over the same period, holdings of equities have grown 63.2% from $77.6 billion to $126.7 billion. However, equities holdings are below their peak in the March quarter of $128.5 billion.
Cash holdings never seem to backwards. According to the quarterly surveys, SMSFs were sitting on $110.9 billion at September 30.
The number of super funds rose to 434,239 funds with 830,883 members during the September quarter.
Bruce Brammall is director of Castellan Financial Consulting and author of Debt Man Walking.