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The super-sized SMSFs and tax

Key points

  • Estimates put the Don Argus SMSF at around $20 million
  • There are thousands of SMSFs with more than $10 million in assets
  • It’s unlikely the current government would consider more tax on SMSFs

 

The case of the Don Argus super SMSF versus the ATO provides a glimpse of the potential amounts involved in SMSFs – and at a time when there are calls to “clamp down on superannuation concessions.”

As recently reported, the Argus SMSF is disputing an ATO decision to charge tax on almost $1.2 million of income earned by the fund. It appears to be based on an argument over whether the fund paid out the minimum amount required for funds in the pension phase – which involves harsh penalties for anyone who makes a mistake.

The numbers

Working back from the $1.2 million figure, some estimates put the Argus SMSF at perhaps $20 million. That’s not necessarily an unusual amount: one accountant with an insight into several high net worth funds, says he has seen one SMSF with about $50 million, one with $25 million and a couple with more than $12 million.

But these are the outliers; he says SMSFs rarely have more than $10 million.

The case (subject to a coming Federal Court hearing) has triggered prurient speculation on how much rich people have in potential tax-free income in SMSFs, though it should be noted that money in super is amassed by people deferring income, sometimes over a lifetime.

SMSFs now contain more than $550 billion of retirement savings and they have become a major concern for the government – because of their potential tax-free income and, now, according to some reports, worries about estate planning.

But examples of eight figure sums in individual SMSFs might not be as isolated as some think. Analysis based on ATO statistics at September last year reveal 0.4% of more than 550,000 funds – or about 2100 funds – hold more than $10 million each of assets. Another 9500-plus SMSFs hold between $5 million and $10 million and another 55,000-plus SMSFs with between $2 million and $5 million.

Not a Coalition issue

There has been talk of re-imposing a nominal tax on all this potential retirement income – which looks close to a political impossibility. First, it affects the Coalition’s natural constituency and to be effective it would break the golden rule of no retrospective legislation. It also would be shutting the stable door after the horses have bolted – if high net worth SMSF members haven’t yet begun a pension, they’re likely to do so at any hint of legislation.

If Treasurer Joe Hockey wants to staunch the flow of tax-free incomes, he can only blame former Liberal Treasurer Peter Costello. In the 2006 Federal Budget when the revenues were rosy, Costello made benefits paid from super funds as retirement income tax-free. This, plus the move to allow people to put a one-off $1 million into super, helped build up the funds for future flows of retirement income almost, or completely, tax-free.

As baby boomers move into retirement, this will only increase. The super system’s annual payout of benefits is approaching $60 billion a year. In the year to September 2014, $30 billion was paid out in lump sums and $27 billion in pensions; within a year or so, on current trends, more than half will be tax-free pensions.

The former ALP government floated the idea of a tax on income from super above a certain level. The 2013 Budget proposed a 15% tax on fund’s earnings above $100,000 a year – but the incoming Abbott government decided not to go ahead with this measure.

Attention deficit

Now, with rising complaints about unfairness in superannuation policy, the Abbott Government still seems to be focused on ideological matters – resuming its battle with industry funds over default funds – rather than facing a looming problem in the treatment of retirement income.

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