Your Super is safe as houses…were…before the budget

Six years ago, I first met Nigel Farage. We bumped elbows and mumbled greetings through face masks, before recording an interview in a London restaurant.

Over drinks afterwards, I told him that the UK government would eventually tax people’s ISAs.

It was inconceivable at the time. The whole point of these sacred investment vehicles was their tax-free status.

You can’t encourage people to plough their money into a tax wrapper each year, only to remove the premise for doing so!?

A few years later, in one of our weekly videos, Nigel suddenly pointed at me and said, “You told us they would come for our ISAs!”

Sure enough, the government had just announced their plans to begin applying taxes there after all.

Any tax-break the government giveth, it can taketh away.

Just ask Australian property investors!

Did the ATO pop the property bubble?

Canada, New Zealand and China have successfully deflated their property bubbles without triggering economic chaos.

Canada and New Zealand did so with supply-side reform. China imposed an odd regulatory crackdown. But the point is that popping a housing bubble doesn’t need to trigger economic chaos.

Australia, however, is trying something different. It wants to solve the unaffordable housing problem by removing tax-breaks on those that provide the housing!

So far, the new tax rules have triggered an unusual fall in property prices. We’ll see how things unfold from here.

But the first thing to notice is this: Australian tax rates are so high that only tax efficient investments make sense. Whether it’s franking credits on dividends, negative gearing on property or tax breaks on Super.

But investment strategies that are motivated by tax breaks are bonkers. Because those tax breaks can evaporate faster than you can say ‘intergenerational equity’.

So far, politicians have come for property investors and capital gains. But it won’t stop here…

Franking credits and Super are next

Australia’s tax treatment of dividends is far too generous to last.

A close personal acquaintance who recently inherited a lot of European shares did the maths. If the same income were paid on a portfolio of Australian franked dividends, the effective tax rate would halve.

The difference is big enough to require taking action. The question for the heir is whether to sell the European stocks and buy Aussie ones, or move overseas…

But it’s Superannuation that I’m even more worried about. Because you can’t just sell out and escape whatever the government has planned for your Super.

The economist Stephen Koukoulas @TheKouk recently dropped a big hint for what the government has planned:

I am not sure people realise how trivially small the level of gross govt debt is, even as it hovers under $1 trillion. There are $4.5 trillion in superannuation assets; $12 trillion in residential real estate; $3.5 trillion in the ASX. Annual GDP is $3 trillion. I note that net govt debt is around $0.55 trillion – chook feed in other words

You see, bringing up Super assets when considering whether government debt is sustainable only makes sense if you plan on taxing Super assets at some point. It’s not like you can claim your neighbor’s income on your mortgage application. You have no claim on it.

But the tax breaks on Super? Those are by the government’s leave…

And so the comparison made by the former Senior Economic Advisor to Julia Gillard exposes how the government sees those assets. They could easily become taxed at far higher rates. Just like the UK ISAs.

And if you think that’s unlikely, consider this article from the Australian Financial Review:

Australia has been singled out by the Organisation for Economic Co-operation and Development for having an overreliance on the taxation of wages and salaries to fund the budget.

The difference between us and the rest? They pay taxes to fund their social security system. We pay involuntary contributions to Super.

Can you tell the difference?

Me neither.

And this fellow quoted in the AFR likewise:

Australian National University Tax and Transfer Policy Institute director Robert Breunig said the tricky part about comparing Australia’s tax system internationally was other countries’ use of social security contributions, which are similar to payroll taxes and are used to fund their welfare and pension systems.

When social security contributions are included in the income tax take of other countries, the gap with Australia narrows.

“We have an age pension that is funded out of general revenue and superannuation, which belongs to the individual,” Breunig said.

“Because Australians get to keep their superannuation for retirement, people think about it differently to a tax. But in many ways, the economic effects are similar to a tax on labour income.”

Francis said superannuation is not regarded as a tax in Australia, but the social security contributions common in Europe and the US are.

“The social security tax difference is largely accounted for by the difference with how our retirement income system works versus others,” he said.

In other words, the OECD analysts have no idea what they’re talking about. They are comparing apples with oranges.

But what I want to draw your attention to is how retirement systems tend to be considered political footballs around the world. Politicians can kick them to see what taxes fall out.

We are the exception, thanks to our compulsory voluntary contribution Super system. For now. But not for long.

Mark my words. The ATO will raid your Super. Because that’s where the money is.

Of course they won’t call it a raid. They’ll merely repeal overly generous tax breaks on the rich.

And that’s what makes it easy for them to get at the money.

All this is why my friend James Cooper has been focusing on overseas opportunities at Diggers and Drillers.

But that is about to change. He has identified an $18 trillion opportunity – big enough to make taxes a sideshow.

Find out more here.