The tax advantages of self managed super funds have been underlined by recent Tax Office statistics showing that 300,000 SMSFs pay no tax. That is almost two thirds of the total number of SMSFs. What is a problem in terms of social equity in Australia is a strong argument in favour of having DIY super. The AFR reports:
"Only a fraction of Australia’s half-a-million self-managed superannuation funds pay any income tax, experts say, because of generous super concessions and franking credits that are undermining the federal budget.
Tax Office statistics show almost 300,000 self-managed superannuation funds eliminated or reduced their tax bills through exemptions on super and $2.5 billion in franking credits in 2011-12. These are the most recent records available, although experts say the surge in dividend payments since then has further reduced the small amounts of tax paid by these funds, which are often the primary income of wealthy retirees.
At the time, 424,360 funds generated gross taxable income of $32.9 billion. About $15 billion of that was entirely exempt from income tax because the funds were in the pension phase, which doesn’t incur income tax.
Self-managed funds contribute little to the tax system – because about half of the funds’ assets are already in the pension phase, Tria Investment Partners principal Andrew Baker said. Also, most self-managed funds receive franked dividends, which cuts the tax bill of many other funds to zero.
“It’s a problem isn’t it?” Mr Baker said. “It’s unlikely SMSFs are ever going to pay a substantial amount of tax as a segment.”
The loss of revenue will rise because of an ageing population shifting assets into pension phase and the greater payment of dividends, he said.
Pressure is growing to focus on superannuation tax breaks in the Coalition’s planned review of the taxation system. The government is desperate to find ways to reduce the budget deficit."
It is likely that at some point governments will have some kind of tax on super, given the pressures on the Budget and the effect of ageing. It will probably be means tested, but this is such a large loophole in the tax system it is lilely it will be plugged at some point. But, given that there are 1 million trustees of SMSFs it will be about as politically unpopular as winding back that other great tax loophole, negative gearing on property. Any changes are likely to be only incremental.
The average SMSF fund holds about $920,000, according to the Tax Office. About half invest directly in Australian shares, which means about $180 billion is allocated to the local market, a sizeable amount. Here are some other statistics on franking credits:
The irony is that as the tax distortion gets larger, the chances of winding it get back get smaller because of the political backlash. This is a point made by Saul Eslake:
'Leading economist Saul Eslake said he was “undecided” about whether dividend imputation should be scrapped, although he had previously mentioned it is a costly tax break that the wealthy use to lower their marginal tax rates.
He said that like negative gearing, there are now so many who benefit from franking credits – SMSFs, investors and members of larger public or industry super funds – that “no matter what the intellectual merits of getting rid of it, it ain’t going to happen for political reasons”.'