Australian Treasurer’s super & franking credit mistakes ring alarm bells
The election of the ALP government last year created a unique linking of political capital and union power creating grand visions superannuation-funded government programs
Around the parliament there is increasing realisation the treasurer’s superannuation and franking credit blunders are not just bad Treasury advice.
The industry superannuation funds made a significant contribution to his errors and the smarter people in their ranks now realise that not only has confidence in superannuation been damaged, but there is danger of further damage if the sharemarket and superannuation performance are hit by prolonged higher US interest rates.
Old timers link the recent industry funds’ mistakes to an arrogance that equates to the arrogance that contributed to the downfall of the once great AMP society.
Like the industry funds of today, a quarter of a century ago AMP was at the peak of its unrivalled Australian capital power.
It began making mistakes and was completely outmanoeuvred and outperformed by the then-nimble industry funds led by AustralianSuper.
The election of the ALP government last year created a unique linking of political capital and union power creating grand visions superannuation-funded government programs like investment in start-up enterprises, manufacturing and social housing.
But for that high risk strategy to work there must be community confidence in superannuation which is why the treasurer’s mistakes, when combined with market jitters, are ringing alarm bells.
Last year the superannuation industry body supported a $5m cap on the amount that could be held in superannuation funds.
But the funds didn’t work out a policy to accommodate defined benefit funds and, even more seriously, didn’t tell the treasurer that while the cap was easy to administer in self-managed funds the industry funds’ systems made it impossible to know both how much people had invested in numerous industry funds and their taxable returns.
The treasurer, possibly not knowing the impossibility of administering any cap, went one step further and established the cap at $3m.
When Jim Chalmers was told the horrible truth he came up with a draconian scheme that taxed unrealised gains and abandoned the capital gains discount. In addition there would be no indexing of the $3m cap.
If it could be administered properly an indexed $3m cap would not have harmed confidence in superannuation. But these new draconian taxes and no indexation of the $3m set a precedent that if continued would almost certainly undermine community superannuation confidence and jeopardise the “grand plan”.
The more alert industry fund people are scrambling try and get the treasurer out of the hole they helped create.
It’s not easy because the whole superannuation taxing system is a combination of all members and can’t be separated.
The best idea that has been produced is that amounts over $3m are deemed to have a return related to the bond rate which would mean that in good times the tax would be low but, if there are losses there would still be a tax.
It’s not ideal but it’s better than the draconian system that been announced.
Then came treasury inspired scheme to hit franking credits as a first step to their long term desire to remove them completely.
The industry funds should have led the protests on behalf of the Australian community but for some reason held back.
Perhaps it was their involvement in $3m cap mistake or perhaps it was because they had been major past beneficiaries of the one of the Chalmers bans – the blocking of the rort that used franking credits in capital returns.
Yesterday I explained how the Chalmers attack on the use of franking credits in capital returns was long overdue. But the second anti-franking move by the treasurer will create enormous uncertainty in franking dividends.
The smarter people in industry funds know that this blunder will harm confidence in superannuation across the board but no one is prepared to publicly blast the treasurer and, as yet, no one has found a way of getting Chalmers out of the hole he and Treasury have created.
Meanwhile adding to the government’s community superannuation confidence blows, Assistant Treasurer Stephen Jones described members’ funds in superannuation as “honey” that should be used to benefit the government’s “hive”.
Superannuation fund members regard the money as their funds to be used to provide returns for retirement and the thought that their money was actually government money to be used for government wishes was horrific.
We are already seeing a rise in contract and casual labour which avoids compulsory superannuation and enables people to use their the extra funds to reduce their mortgage – a retirement investment that looks much better than the government-endangered superannuation investments.
The government will try and curb the “gig” economy but the confidence reduction momentum started by the treasurer, which could be fuelled by any share market fall, will not stop that momentum.
My message to Chalmers and Co is: Remember AMP.
ROBERT GOTTLIEBSEN
BUSINESS COLUMNIST
Robert Gottliebsen has spent more than 50 years writing and commentating about business and investment in Australia. He has won the Walkley award and Australian Journalist of the Year award.
Original article here
Robert Gottliebsen: Superannuation changes a repeat of horror 1987 Labor, union fund
ROBERT GOTTLIEBSENFollow @BGottliebsen
The Albanese government’s confusing superannuation agenda is becoming clearer – they are in the process of introducing a 2023 version of the Australian Labor Party/Australian Council of Trade Unions’ 1987 superannuation blueprint - and that blueprint is horrific.
It proposed that the Hawke-Keating government of the day conscript 20 per cent of Australian superannuation income for a body to be set up to promote government-favoured projects and union agendas.
When former ACTU official and current Assistant Treasurer Stephen Jones last week stunned the superannuation community by claiming that members money was “honey” that should be managed in the best interest of the “hive” (i.e. the government hive) - no mention of returns - old timers, like me, went scrambling back to the records to confirm memories.
The superannuation community is currently being confused by the gymnastics that trigger higher taxes or bans on superannuation balances above $5m or $3m. But that is only part of base agenda which revolves around the ALP’s entrenched belief that superannuation is government rather than members’ money.
The ACTU and the Hawke/ Keating government combined in 1987 to set out an “Australia Reconstructed” strategy document that included the establishment of a “hive” called the National Development Fund to invest government money in enterprises in accordance with the agenda of the day.
The Albanese government has embraced a duplicate body called the National Reconstruction Fund (the word “development” has been replaced by “reconstruction”) to “support, diversify and transform the Australian industry and economy helping to create secure and well-paid jobs, securing future prosperity and driving economic growth”.
Behind that lofty ambition is a plan to invest across seven priority areas including renewable and low-emission technologies; medical science; transport; value added agriculture; forestry and fisheries; value added resources and defence capability.
The government has allocated $15bn for this enormous task. It is clearly not nearly enough to do the job properly. Where will the extra money come from? We go back to “Australia Reconstructed” for the likely answer.
Back in 1987 the ALP/ACTU proposed National Development Fund aimed to provide equity capital and “soft loans” to invest in industrial capacity. Priority would be given to investments in import replacement, export expansion, industry modernisation and reconstruction activities – an incredibly similar set of aims to the 2023 fund.
But added to the priorities was a set of extra criteria for enterprises to be eligible for funds including union approved dispute settlement procedures, work and management practices and other union agendas – for example, the recipients of the 1987 development fund money would be fully unionised.
To fund the proposed National Development Fund “all superannuation funds will be required to make available up to 20 per cent of their future income to be drawn on by the “National Development Fund”. Presumably that would include retail and self-managed funds.
At that time the Keating compulsory superannuation levies were still in the pipeline so total superannuation funds were much smaller than today. “Australia Reconstructed” proposed that if there was insufficient money there would be a one per cent tax on all imports supplemented by a surcharge on luxury imports.
The 1987 fund would be managed by the government’s Australian Industry Development Corporation (AIDC) which was established in 1971 by a Coalition government and by 1987 had a large portfolio of investments.
The 1987 National Development Fund/superannuation strategy was interrupted by a Wall Street crash, a recession and a government change. But had it proceeded then almost all the “conscripted” members’ superannuation money would have been lost given the massive $3bn plus losses that were later incurred in the AIDC “hive”.
Victoria’s ALP government tried a similar government investment strategy and the consequent mountain of losses that followed cost Victoria its State Bank which was snapped up by the Commonwealth Bank. Government sponsored bodies are not good at investment selection
Back to 2023 and the Albanese government will no doubt deny in strong terms that it has plans to conscript 20 per cent of Australians’ superannuation funds income for the “National Reconstruction Fund”
But in last year’s election campaign the government promised that there would be no changes to superannuation when we now know major changes were being plotted.
Government denials and statements on future superannuation policy therefore now have limited credibility.
One of the Industry Fund masterminds Garry Weaven bemoans that what’s happening under the Albanese government is “undermining the whole basis of super”.
Fascinatingly Jim Chalmers did a PHD on the Paul Keating era which included “Australia Reconstructed”. Accordingly Chalmers now appears to be defining superannuation in a way to make it easy for Australian superannuation members’ money to be the “honey” that can be conscripted for the government “hive” – the National Reconstruction Fund.
Chalmers is also proposing that his definition of superannuation include the word “retirement”. These days most people know that the best retirement asset is owning a dwelling. Superannuation is great but it is second.
Unlike Chalmers, the ALP/ ACTU designers of “Australia Reconstructed” also understood the importance of dwelling ownership in retirement and set out that the “National Development Fund”, should provide loans for houses preferably for first home buyers and low income earners.
The government will almost certainly ignore this part of the “Australia Reconstructed” master plan because its too close to Coalition policy.
Instead it looks like industry fund money will be sucked into social housing projects instead of helping new home buyers.
If the full 1987 Australia Reconstructed agenda (outside housing) is embraced there will be a 15 per cent of invested funds limit on how much superannuation funds can invest overseas.
The sad thing is that governments, and particularly Australian governments are not good at running these enterprise investment funds so if superannuation income is conscripted the outlook for superannuation in Australia is bleak.
ROBERT GOTTLIEBSEN
BUSINESS COLUMNIST
Robert Gottliebsen has spent more than 50 years writing and commentating about business and investment in Australia. He has won the Walkley award and Australian Journalist of the Year award. He has a place in the A... Read more