Superannuation tax loophole impacting housing affordability
There is a loophole in superannuation taxation arrangements that is not only costing the Government money but is likely impacting housing affordability, according to the former Chief Investment Officer of Sunsuper, David Hartley.
In doing so, Hartley has pointed to data which showed that housing affordability based on the ratio of dwelling prices to income deteriorated sharply from 2000 describing it as attributable to the loophole in the current tax regime applying to superannuation funds.
Making clear he is speaking for himself and not any of the major financial institutions with whom he has been employed, Hartley claimed to the Senate Economics Legislation Committee that changes to superannuation legislation which occurred in 2007 permitting superannuation funds to borrow to finance investment in property and other assets have become problematic.
He said legislative changes were also made to make superannuation retirement benefits payments exempt from tax.
Hartley has produced evidence to a Parliamentary committee arguing that the current taxation settings have “directly contributed to a decrease in housing affordadability”.
Referring to the 2007 legislative changes, Hartley said that “as a result of these changes, it became possible for superannuation funds to negatively gear investments within the fund and then, once a member is in retirement, sell the negatively geared assets at a profit and pay no capital gains tax”.
“This currently means that tax deductions are allowed against income and contributions tax within a superannuation fund on investment arrangements that are not expected to generate taxable capital gains.”
“Naturally this makes investment into assets that tend to accumulate in value over time attractive for a superannuation fund. This is especially true for a self-managed superannuation fund that can be used as part of a comprehensive and personalised tax planning process,” he said.
“It is up to the Government to determine the extent to which this loophole impacts taxation revenue and whether it wishes to address it.”
“One way for the Government to close this loophole, if it wants to, would be apply a deemed realisation of capital gains at the point of retirement. This treatment would recognise that it is at this point that the tax status of the fund changes. There are other ways.”
“In addition to the potential detriment to Government revenue, it is also possible that the current taxation settings for superannuation funds have directly contributed to a decrease in housing affordability,” Hartley said.
Sorry mate, nothing your sprouting makes any logical, super or tax sense.
Do you know every Super Account that moves into pension does NOT pay deemed CGT on any assets ?
Including all your Industry Super members with so called capital growth on Unlisted Assets. Yep no deemed CGT.
If you want to campaign again to stop SMSF Borrowing, take it to the election.
Went well for Bill Shorten hey.
Industry Super Moronic Propaganda.
This is not quite correct. Some industry funds provide a credit for deemed CGT but others dont, the units are revalued and the funds effectively bank the credit. It varies depending on trustee obligations (the deed) and how they operate their investment pools and unit pricing.
And I bet ISA funds that steal the unnecessary CGT from members don’t advise their members of this TAX cost they don’t legally have to pay ????
What grandstanding before a Senate committee. As a long standing accountant in the SMSF field I have never seen a super fund negatively gear a property in order to get a tax free CGT. This would be a very high risk investment decision as capital gains are unable to be predicted and can take ten years to occur. An SMSF investing in residential property means that the property is on the rental market and thus increasing the supply of rental accommodation. One hopes that the Senators saw through this nonsense.
One hopes that the Senators saw through this nonsense.
I doubt it! Haven’t seen the carnage Pocock and Lambie are causing.
Peter, and Kim below, the issue is not just the supply of accommodation (rental or otherwise). It’s the price. At the moment price is artificially high due to the extra demand created by the financial concessions and incentives associated with residential property.
Also, property investment does absolutley nothing to increase supply, unless it’s investment in new builds. New builds are only 1-2% of total property investment, and are pretty much precluded for SMSFs.
If lots of property investors sold their properties due to the withdrawal of financial incentives, those properties don’t vanish into thin air. There is no reduction in available accommodation. There is just a reduction in price, a new owner, and a reduction in the housing affordability crisis.
Do you think there would be a mass exodus if the tax concessions were withdrawn? For some, yes but then the investment decision may not have been thought through as carefully as was needed.
Gearing to invest should be based on the ability to increase the investment size and must be considered against serviceability. Sure tax concessions help cashflow but I would say you are flying a bit close to the wind if this causes a panic sale on a change to the tax settings. Lenders are conservative and stress test serviceability. If this wasn’t the case, then we would have seen a lot more dumping of property when interest rates rose for a 13 month period. If a person invests for negative gearing they are missing the point. The value is in the capital gain at the end. But here’s the thing, if you change the capital gains tax settings, existing investors may just hold for longer.
In any case, existing investors would likely be grandfathered so the impact of the change to tax laws would be a slow burn. Just as slow as the real solution to this so called “housing crisis”, an increase in supply from construction.
No, I don’t actually think there would be a mass exodus if concessions were withdrawn. However the mass exodus scenario is often used to justify retention of negative gearing, by claiming “investors would leave the market and renters would have nowhere to rent”.
I’m just pointing at that if it did happen, properties would simply change ownership to other investors, or to existing renters who then become owners and reduce the size of the rental pool. The properties don’t disappear. Tax driven purchases of existing properties for investment purposes do nothing to increase supply. They just increase demand, and consequently price. Go to a few property auctions and you’ll witness this in action as tax motivated investors bid up the price and aspiring first home buyers miss out.
“One way for the Government to close this loophole, if it wants to, would be apply a deemed realisation of capital gains at the point of retirement. This treatment would recognise that it is at this point that the tax status of the fund changes. There are other ways.”
Calling BS on this one, another anti SMSF zealot working in the ISA fiefdom!
He is quite correct. All concessions and incentives that favour property contribute to the housing affordability crisis. This also includes:
It will be interesting to see how much headway the Greens make on this issue at the next election, now that they have sniffed it’s a burning issue in the electorate that the ALP has no intention of fixing.
Afraid your cherry picking and off topic. This is about SMSF, in my 35 year career the only property purchases I have bee involved in have been small and medium business buying the commercial or office space they run their business in. Not residential
Not true. Your assertions have a very very small impact.
Its all down to demand and supply.
As “one foot out the door” has said, SMSF’s may invest in some residential property, but the ones I dealt with were predomionantly Business Real Property (commercial and Industrial).
The key demand is coming at this time from the significant number of migrants entering Australia and looking for a place to live. We are NOT building anywhere near the number of new dwellings to meet this demand and therefore the demand for an existing dwelling goes up significantly.
Also worth noting, that many of the new migrants dont know where they want to live, work, or send their children to school, and so they will rent from those who are landlords. This saves the new migrant the costs of owning and acquiring a property let alone qualifying for finance while new to the country and still on probation!
More nonsense from Union mouth pieces. The debate about taxing unrealised gains on transfer to the pension phase has simmered for many years. The problem is that neither the legal nor the beneficial ownership of the assets change so the legislation would need a radical change to support this off the cuff comment. In any event, even the ATO and ASIC don’t see SMSF borrowing to be a problem.
As to being a solution to the “housing crisis” (Is everything a crisis these days?), Peter nailed that in that, the rules require the property to be leased to an unrelated party so in effect increases rental supply. While on the topic of supply, this is the key to solving the “housing crisis” that isn’t something a SMSF can be held to account for. In addition, contribution caps means we are not dealing with luxury properties here. Have a look at the SMSF Statistics published by the ATO is you want to see the average and mean borrowing
How many SMSFs own residential property? Enough to actually impact affordability? I wouldn’t have thought there would be enough SMSFs to impact the housing market. Maybe they need to change the rules that existing residential property needs a 60% LVR (reduced negatively geared = reduce tax concessions) and incentivise new property construction with allowable LVR at 90% or something along those lines, to build housing supply.
On another note It’s interesting all these hit pieces on SMSFs are starting to come out, via media releases from various corners of the industry super lobby and supported by the increase in compliance from the government. It’s almost as is if the government want to funnel more money into industry super and for industry super to support/fund the governments infrastructure and social projects.
Spot my point exactly, other contributors here seem to miss this!
I’m currently building while living in my existing home…well, the building hasnt started yet as council have yet to approve the plans…but it’s not stopped them eagerly sending me & others their invoices for Water and sewerage that has been “supplied to the entire unbuilt estate” but that has not been connected for use as yet. Fees for no service anyone?
If I may use my experience to weigh into this, I think it’s important to point out a few things.
I’m not sure why someone would want to negatively gear property within an SMSF as the return is only 15 cents in the dollar, as opposed to your marginal tax rate when the property is held outside the fund. Added to this, a negatively geared property generates tax losses and not capital losses.
Over and above, if the SMSF has carried forward tax losses and the trustees commence a pension, there is no tax on earnings charged to the fund, and therefore you cannot recoup the carried forward tax or capital losses generally.
It appears to be yet again another attack on the SMSF sector………………
I’ve one of these “problematic loans allowing super funds to negatively gear”……it’s for my commercial property…..Not impacting the housing market at all and with the work from home movement it’s actually supporting the economy by having business centres, creating coffee shops and retail spaces.
Secondly what percentage of the market takes these out?
Finally if you want ways to funnel more money into your Industry Super funds just get rid of Financial Planners and Accountants..oh wait you’ve done that.