Mar 27, 2017

Super borrowing leaves funds exposed if the property market crashes

The government's reluctance to address property lending to superannuation funds is helping reduce housing affordability and increasing the risk a property crunch will cause widespread economic damage, Glenn Dyer and Bernard Keane write.

One theme running through the debate about how to address housing affordability, and the increasing and contrary concerns about an apartment market crunch, is the unwillingness of politicians to use their levers, while expecting the financial regulators to manipulate theirs so adeptly that any number of complex problems can be solved.

This doesn’t merely apply to the current situation of a government that professes to be concerned about housing affordability but which has relinquished the use of its legislative tools -- negative gearing and capital gains tax laws -- while encouraging regulators to use macro-prudential tools to crack down on property investor lending.

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4 thoughts on “Super borrowing leaves funds exposed if the property market crashes

  1. bushby jane

    Quite right, that last paragraph.
    However, if the housing bubble bursts and SMSFs lose money, doesn’t this amount to the same risks as other investment such as stocks and shares gambling?

  2. Dog's Breakfast

    Allowing borrowing within the SMSF structure was always a bizarre policy, and undoubtedly was a factor in the growth in housing investment, although how much can be reasonably debated.

    But what a stupid policy. Brought to you by Peter Costello! Yep, him again.

  3. AR

    The property market continues to defy the laws of physics, gravity and even the dismal ‘science’ of economics. The longer the correction is delayed the greater the crash.

  4. Jack Robertson

    Geez, who’d have ever thunk it BK! Yes, yes, terrific article…but…you know. Only about a decade late. Anyway. Broken Record Inc, me. Sorry, but…yeah.

    And it’s worth unpacking just how lucrative the SMSF housing tax rort really is. The use of it has been accelerating these last few years, precisely because of the astouynding tax-dodge they provide the canny, wealthier investor, who can afford the higher cost loans and the tricky, very technical management required to fully access the advantages. As with so much of this debate, the detauils are where the devil sits, shitting all over our long-term budget structural planning.

    You can directly invest in a house, sit on it for a year, and then flip it, grabbing that fifty percent CGT discount. On a 20% gain in a year (Sydney last year was 18% on average), that reaps you about a $50K windfall (assuming you are on the top marginal income tax rate of 47%). ie 200K CG – 100K (discount), then 100K x 47%…(- whatever stamnp duty/legals/expenses etc it costs you along the way to buy/hold/ flip, which with NG adroitly managed you can also minimise).

    But let’s say you buy the property through a SMSF. Yes, you’ll pay more for a loan and there’ll be costs for establishing/running the SMSF. But do it a few times and the economies of scale and efficiencies start to look good.

    The big gain is of course in the tax treatment. Your property can earn rent via the SMSF (and a ‘bare trust’, which you can pay a corporate to look after – nice little growth cottage industry, by the way), and it pays only 15% tax on it…for the first year, then, after that, you get (unbelievably) a further discount to 10%. Likewise with the CGT. Sell it prior to switching your SMSF to pension mode and your SMSF only pays 15%/10% on the capital gain. So compare that with the ‘mere’ 50% CGT discount above. Your CGT tax bill on the 200K CG drops from, what, $47K to…15K/10K. On a 200K annual gain. Less ‘regressively in favour of the wealthy’, than fucking obscene, long-term budget deficit fiscal madness. Yep, there’s hoops you have to jump through, in terms of being able to demonstrate that the SMSF property is ‘sole purpose’ watertight (ie providing only for your eventual retirement pension), and there’s also limitations on who you can sell to and rent to (to stop you living in your own SMSF’s house, etc)…BUT again, even this is side-stoppable with adroit management and technical trickery (run/start a small business from your home and the ownership limits can effectively disappear, at least sufficiently enough to discourage the ATO from a diminishing returns court case)…all aspects that make this, of all the three property derived tax rorts, the jewel in the crown of the very rich and the very legally savvy. Peter Costello’s spiv chums up the Toorak Road, etc.

    Oh, sorry, almost forgot. If you – sorry, your SMSF/bare trust trustee/members – puts your SMSF in pension pay-out mode just before you – sorry, your SMSF/bare trust trustee/members – sell any property it owns…then you (‘it’) pays zero capital gains tax. Zero. None. Nada.

    BK is right to say that SMSF’s are the most regressively repulsive of all three of the tax rotts that are driving our domestic economy into oblivion. Not to mention over-heating the housing market and houses prices in a Ponzi-style frenzy. Because they are so difficult to understand they have not had the same notoriety as CGT discount and NG. But because of their breathtaking capacity to ‘legally launder’ fast profits from the property market in a way that effectively quarantines them from tax – and because they are the plaything of both a) the very wealthy and savvy, and b) the older investor (because you need to be plausibly close to ‘retirement’ age to access the ‘pension payout’ mode part…they will be the very hardest to dismantle. Forget grandfathering, phasing out, all that crap…the investors who use these will fight in court to the death. How many ‘semi-retired’ super-wealthy ‘property investors’ are there out there, coining the shit out of this scam? But hey, I don’t care about the wealthy grubs, good luck to them. As with the other tax rorts – and also as BK/GD say – the real ‘crisis’ is the wider impact on the superannuation community in general: deeply structural, deeply skewing.

    Ian Verrender has been consistently good on this stuff for a while. He is again today.

    We have been stealing money from our own future to do nothing more useful than keep artificially firing up and up and up the price of housing today. Everyone is implicated, from successive federal governments, reserve bank officials, senior bank executives (‘heroes’ of corporate capitalism like Westpac’s Gail Kelly, who like most of her peers made here career/whopping bonuses out of the soon-to-be-ruinous shift into over-skewed housing lending) senior economists and economic journos to real estate and building industry lobbyists, State treasury SD bounty reapers, investors big and small, mums and dads whose eyes have lit up at the skyrocket ‘worth’ of their family home…the superannuation industry, legal and property trust experts…on and on. One long sad story of us being good-times-splurgy grasshoppers instead of industrious, shrewd saving ants…

    It will, of course, all end up with the taxpayer footing the bill. And the only winners…those canny investors who got into the Ponzi scheme early, and get to jump out the top, loaded. And then buy even more property, cheap, in the correction chaos.

    Anyway. Blah blah blah. Good piece. More of this, please. Details, details, the devil is in the details. Follow the money. Who owns the houses? Who owns the trusts? Names, numbers, details, details….where has the bounty of the good times really gone? It’s not the politics of envy or class warfare. It’s about sustainable budget structural sanity. It’s about maintaining Australia’s brilliantly progressive taxation system, in practice not simply name…because it’s THIS, the collective sharing around (within generation, as well as across generations) of our growing wealth, that alone has defined Australia’s superbly stable, solid and fair economic management/progress since 1901. Made it rightly the envy of the world.

    Our dumb, boring, banal, unsexy, no-vaudeville-switch-to-flick-here-PK…and insanely ill-thought-out…housing tax fiscal policies, accumulating lazily and short-sightedly since about 1984, might well have destroyed it for good.

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