Well here we go again.
Hardly a day goes by when self managed super funds aren’t being attacked. In the vast majority of cases, those leading the charge are opposed to SMSFs for commercial reasons.
Let there be no mistake: the forces attacking SMSFs are powerful.
But as a group, SMSF members and trustees are powerful in their own way. (At the bottom of this article I give you some ideas on how you can protect your wealth from adverse Government policy caused by the negative politicking of SMSFs’ enemies.)
Power in numbers
There are enough SMSF trustees to change the outcome of elections at all levels of government in Australia.
Furthermore, SMSFs, as a group, have effective control over many of the top Australian listed companies, including the big financial institutions that have publically attacked SMSFs.
However, this authority is only useful if SMSF trustees actively defend themselves against the nonsense that is often spoken about.
Let’s take some examples of recent criticism.
1) SMSFs don’t pay tax
The latest ATO Statistics (for the 2012 financial year) cover about 425,000 SMSFs.
At the end of June 2012, SMSFs had about $419 billion and APRA funds about $860 billion. The ATO stats show that APRA funds pay about 0.9% tax on their assets, whereas SMSFs only pay 0.3% tax on their assets.
Why do SMSFs overall pay less tax than APRA funds? Because APRA funds receive the vast bulk of employer contributions (that is taxable contributions) each year. Extract employer and personal deductible contributions from APRA funds and they pay a similar rate of tax as SMSFs.
Two interesting points to note about the ATO statistics:
- 60% of APRA funds have $63 billion of capital losses (7% of total fund assets) and 47% of SMSFs have $18 billion of capital losses (4.2% of fund assets) that can be offset against future capital gains. This difference says a lot about how quickly APRA funds traded assets during the GFC.
- 44% of SMSFs and 60% of APRA funds pay pensions.
2) Franking credits reduce tax payable
Franking credits are a simple mechanism to ensure dividends are taxed at the owner’s applicable tax rate. That is, they neutralise the impact of company tax.
The biggest misconception about franking credits is that they reduce tax. If a company’s directors distribute profit to its shareholders via dividends, those shareholders must include the dividend paid plus the attached franking credit in their taxable income.
A super fund pays less tax itself when it has franking credits because some of its tax liabilities have been pre-paid by the company. Between the payment of that company tax and the effective refund to the super fund, the Tax Office has had free use of your money.
Excess franking credits are refunded to super funds (and charities and potentially individual taxpayers) and some claim this is a problem. Any mischief here – if this really is a malignancy – is created by the tax system. Compared to APRA funds, SMSFs have more money in the pension phase, and therefore more franking credit refunds.
What you can do
- Are you a shareholder in any financial services business operating in Australia? Write to the chairman and the company’s board. Express your displeasure on any attack they make on SMSFs. Let them now that unless it ceases forthwith, you’ll have to seriously consider asking questions at the next AGM about their views, vote against all of the board sponsored resolutions (especially the remuneration report!) and possibly even sell your shareholdings. You can be sure your views will rapidly trickle down to senior management.
- Are you an industry fund member? Write to the trustees and suggest their time would be better spent running their fund properly rather than commenting on or criticising another segment of the superannuation sector.
- Finally, write to your state/territory and federal politicians and tell them that you want them to publicly back SMSFs. If they’re not prepared to look after your interests, then they can hardly expect your vote at the next election. All politicians become and remain politicians by counting votes. You have to use this to your advantage.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.
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