This article discusses the impending tax changes to the Australian superannuation (super) system and its potential impact on individuals and the economy. It draws parallels with Hong Kong's Mandatory Provident Fund (MPF) scheme and explores the broader implications of government involvement in retirement savings.
Concerns and Lessons from Hong Kong's MPF
The discussion begins by referencing the debate surrounding Hong Kong's MPF. Some argued against a privately managed system, believing government control would eliminate fund manager fees and protect citizens' retirement savings.
However, the speakers emphasize the importance of control over one's own finances. Giving control to external entities, be it businesses or the government, makes one vulnerable to their potential interests in those funds. The traditional wisdom of keeping money close resonates strongly.
Understanding the Australian Superannuation System
Key Features and Differences from Hong Kong's MPF
The Australian superannuation system is also compulsory, but with crucial differences from Hong Kong's MPF. In Australia, employers are mandated to contribute a percentage of an employee's salary (currently legislated to eventually reach 12%) to a super fund before tax. Employees are not required to contribute, unlike the MPF where both employers and employees make contributions.
While fund managers still take their cut, the speakers note that employees may perceive the Australian system as more favorable since they don't directly see a portion of their salary deducted. However, ultimately it's argued that keeping the money "close" to you is still the best option.
Employer Perspective and the Concept of Taxation
From an employer's perspective, the cost remains the same whether they pay super contributions or direct wages. Some employers might even prefer direct wages, believing it gives them greater control and incentivizes employees more effectively.
The speakers argue that mandated super contributions are essentially a form of taxation. The government diverts a portion of income into a fund, often invested in assets like stocks or government bonds, which indirectly finances government activities. This method masks the direct impact of taxation on citizens' savings, potentially making it more palatable.
The Underlying Reasons for Mandatory Retirement Systems
Financing Government Expenditure
The article posits that governments implement retirement systems to address increasing expenditures and a need for financing. Retirement systems are essentially accessible "piggy banks" that the government can tap into.
Addressing Lack of Savings Culture
Another reason is the perceived lack of savings habits in Western societies. Many employees spend their entire paycheck and lack savings for retirement. The government forces savings and simultaneously gains access to a pool of funds for financing its activities.
The New Superannuation Tax Reform in Australia
The Changes and Their Implications
The Australian government is introducing a tax reform affecting superannuation accounts exceeding AUD 3 million. The tax rate on earnings (including unrealized gains) above this threshold will increase from 15% to 30%. This change has sparked controversy.
The most contentious aspect is taxing unrealized gains. Usually, capital gains tax applies only when an asset is sold and profits are realized. Taxing unrealized gains creates a potential cash flow problem. Individuals may have to sell assets to pay the tax, even if they don't want to.
Unrealized Gains and Potential Losses
The speakers question what happens if the asset value later decreases. Will the government refund the tax paid on unrealized gains? They stress that such a scenario is highly improbable.
They also point out the potential for accountants to benefit. Self-managed super funds (SMSFs) are legally required to be audited, and this change will increase the workload of accountants, who in turn would presumably raise their fees.
The Impact on Younger Generations
Despite the government's claim that only 0.5% of accounts are affected, the speakers argue that many younger Australians may be impacted in the long run. The AUD 3 million threshold isn't indexed to inflation. If left unchanged, bracket creep will push a significant portion of future retirees into this tax bracket.
Potential Responses and Strategies
Tax Lending and Financial Implications
The speakers discuss the possibility of a "tax loan" market emerging where people will need to borrow to pay these increased taxes.
The Role of Accountants
The government requiring self-managed super funds to be audited by accountants will increase the fees they are able to charge.
Avoiding the 3 Million Threshold
Those with well-performing superannuation accounts may seek ways to avoid exceeding the AUD 3 million threshold, such as:
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Investing in assets that don't appreciate significantly.
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Setting up trust funds.
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Establishing offshore companies to manage assets.
These strategies aim to minimize taxable gains within the superannuation system, even if it means diverting funds to less efficient investments or incurring additional costs.
The Broader Economic Concerns
Government Intervention and Distorted Resource Allocation
The speakers express concern about the increasing trend of government intervention in the economy and the potential for distorted resource allocation. Tax avoidance strategies can lead to inefficient investments that lack real productive value.
Global Trends and the Difficulty of Tax Avoidance
They emphasize that tax avoidance is becoming increasingly difficult due to global efforts to combat tax evasion and enforce minimum tax rates. Even traditionally tax-friendly jurisdictions are under pressure to comply.
Protection of Assets and Looming Global Financial Crisis
Ultimately, the speakers worry about the long-term economic implications of government policies and the difficulty of protecting assets in a world where governments are increasingly seeking to increase revenue. They suggest considering assets that are difficult for governments to control, but caution that even traditionally safe havens like gold can be subject to government restrictions.
Conclusion
The discussion concludes by highlighting the potential impact of these policies on global economic growth. Government efforts to increase revenue may lead to distorted resource allocation and hinder long-term economic development. They recommend listeners to consider some of these things from different perspectives.
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