Some leaders in the superannuation sector and in some economic think tanks are ignorant about SMSFs, including how the super tax rules work generally. Yet we have numerous pronouncements by various individuals and organisations about SMSFs not paying tax, or SMSF trustees not having the skills to manage their own money, or sometimes, simply, SMSFs are bad… just because…
The perennial debate about possible superannuation tax changes is disconcerting because some of the so-called experts and disappointingly, some uninformed journalists, are unfairly targeting self-managed super funds, as if SMSFs are subject to a different set of rules. What is particularly perturbing is that certain think tanks and industry associations are embarrassing themselves by promoting agendas that expose their ignorance about how the superannuation system works, and how the super tax rules operate.
Super taxes apply equally to large funds and SMSFs
SMSFs are subject to the same super and tax rules as large super funds. The tax benefits enjoyed by SMSF members are the same tax benefits that anyone in a large super fund enjoys. Any super expert, or commentator, who fully understands how SMSFs operate, would never suggest otherwise.
For good measure however, in 2013, Gordon Mackenzie, Senior Lecturer Taxation and Business Law at the University of New South Wales Australian School of Business decided to conduct some research to investigate whether SMSFs ‘were just tax avoidance vehicles’. Ignoring the unfair assertion that just over 1 million Australians who have had the forethought to substantially save for their retirement are potential tax avoiders, I believe the fact that this research was seen as necessary, indicates how much misinformation about SMSFs is swirling about within the financial community. Even so, the university said the research showed a “surprising result”.
The university found that although SMSFs may be organised in a different way to other types of super funds, it has nothing to do with tax avoidance, “it is simply a function of the legal structure of the super fund.”
The study also found that SMSF trustees were fairly conservative and wanted to be able to “sleep at night and not worry about a knock on the door from the ATO”.
Most significantly, the research found that SMSFs have no tax advantage over large super funds, that is, the tax rules for each type of super fund are the same, except for one rule relating to tax avoidance, which favoured the large super funds. The research did note that the tax efficiencies may differ between types of funds, which I assume refers to how SMSFs manage after-tax returns. Large super funds have only recently embraced after-tax investment returns as a measure for fund managers.
For many SMSF trustees reading this article, you may be thinking that these findings are very obvious, but credit should be given to the UNSW for committing the resources to this issue, especially since many others commenting on SMSFs have no tax expertise whatsoever.
SMSF trustees older, on average, than large fund members
I also want to tackle the distorted claim that because some SMSFs don’t pay tax, that there is some type of illegality going on. SMSF members, on average, are much older than fund members in large super funds, which is generally due to the fact that you need a lot of super to justify the cost of running a SMSF. Accordingly, a higher proportion of SMSF members are receiving super pensions compared with members from large super funds. Earnings on assets supporting super pensions are exempt from tax, in both SMSFs and large funds. Older SMSF membership means proportionately more SMSF members are not paying super tax, compared with large super funds. If the SMSF members in pension phase moved into a larger super fund, they would receive the same tax-exemption on pension earnings.
Franked dividends at risk
On a related issue, recent irresponsible articles have claimed that because SMSFs receive franking credits that SMSFs are somehow avoiding tax. All eligible Australian investors in Australian shares receive franking credits, including investors outside of the super sector.The recent final report from the Financial System Inquiry flagged franking credits from Australian dividends as worthy of review (and removal) in the Tax White Paper, and hopefully franked dividends will be considered an important part of our tax system in the final Tax Green Paper expected to be released in 2016.
I believe retaining the dividend imputation system could become an electoral issue, and I encourage all investors, including SMSF trustees, to make your views known during the Tax White Paper process.
Any politician considering supporting the removal of franking credits from dividends paid by Australian companies, which are received by millions of Australians (including retirees), can expect to have a very short political career. Any political party supporting the removal of franking credits can expect to lose the next election, and future elections. For a considered analysis of the history of franked dividends and the implications of removing the dividend imputation system for Australian investors see our special article Franked dividends are not a tax concession written by one of our regular readers, ‘Jack Simson’ (not his real name).