How Australia is rigged against young people with superannuation

It is the perverse reality at the heart of Australia’s retirement system.

The Albanian government is opposed to allowing young Australians to withdraw their retirement savings early to buy their first home.

But baby boomer investors can buy just as many investment properties or commercial space using their retirement if they have a self-managing fund.

A self-managed superfund is where an individual directs how their retirement savings are invested, rather than left to a large superfund.

Problems with the retirement savings system are in the spotlight as the Labor government of Prime Minister Anthony Albanese this week announced tougher rules on early access to retirement.

In the last election, the Coalition proposed allowing first-time homebuyers to invest up to $50,000 or 40 percent of their retirement if they had saved for a deposit of at least five percent.

Opposition leader Peter Dutton continues to defend the policy, arguing that Labor was inconsistent in opposing super withdrawals to buy a first home, but allowing them to buy investment or commercial property.

“In relation to retirement, your super money in your super fund can be used to buy someone else a house, but it can’t be used to help a first-time home buyer buy their house,” he told Perth radio station 6PR.

It does not make any sense.

Australia’s average super balance in 2019-20 was $145,388, tax office data showed.

But the wealthiest baby boomers are in a much better position to deposit up to $27,500 a year into their super fund and pay a prime rate of just 15 percent.

This grant costs $53 billion a year, with the richest Australians investing money in super paying a favorable rate that is well below the marginal tax rate of 45 per cent for those earning more than $180,000.

Two-thirds of the awards go to the top 20 percent of income earners and less than 1 percent of people have super savings of more than $3 million.

Treasurer Jim Chalmers said it was wrong for the richest Australians to benefit the most from superannuation tax concessions.

“If we all agree that the purpose of retirement is to provide retirement income during retirement, it’s amazing that you can have $100 million in a retirement account that attracts very generous tax breaks that aren’t available outside of the system… It’s clearly not about retirement income,’ he told ABC News.

‘This is about tax management, estate planning, not retirement income.

‘That’s an obvious place to look.’

Buying an investment property

Australians who want to buy a house or unit, as a rental investment property, can do so if they have a self-managed superfund.

The individual trustee of this self-managed superfund, however, cannot live in it and neither can other trustees of this fund or distant relatives of the trustees.

The property also cannot be rented to anyone related to the trustees, nor can it be purchased from a relative even at market value.

H&R Block’s director of fiscal communications, Mark Chapman, said that meant self-managed superfunds couldn’t be used to finance a vacation home.

“Therefore, you are not allowed to buy a holiday home on your SMSF and live there over the summer,” he told Daily Mail Australia.

Labor has not signaled a crackdown on self-managed superfunds, but deputy treasurer Stephen Jones said retirement savings should not be used to buy homes.

“It starts with establishing a political consensus that needs to make it clear that retirement is for retirement income,” he told the Sydney Institute.

‘Not for cosmetic surgery, not for estate planning, not for housing.’

Buy a commercial property

Mr. Chapman said that small business owners could also use a self-managed superfund to buy their store or office and then pay rent directly to this self-managed superfund.

“It’s important to get this right: rent paid must be at the market rate, without discounts, and must be paid promptly and in full on each due date,” he said.

“The investment must also fulfill the general function of the SMSF, which is to provide a retirement fund for members.”

In addition to rental returns and capital growth, Chapman said those who purchased commercial property would be subject to a 15 percent tax on rental income.

‘Having SMSF buy the building may make sense for your business, but is the building a good investment for SMSF?’ he said.

Properties held for more than one year are eligible for a one-third capital gains tax discount.

If the commercial investment property is purchased through a loan, the mortgage interest payments are tax deductible to the superfund.

“If expenses exceed income, there is a taxable loss that carries over each year and can be offset against future taxable income,” Chapman said.

Any rental income or capital gain from the self-managed superfund is tax-free once the individual reaches retirement age, but if a loss is incurred on a rental property, it cannot be offset against personal income tax off the bottom.

Manage a self-managed superfund

Australians operating a self-managed super fund have until February 28 to file their annual return with the Australian Taxation Office.

But the deadline is May 15 if the trustees use a fiscal agent to report their assets and liabilities and a gain or loss for their fund balance as of June 30, the end of the prior financial year.

Chapman said that self-managed superfunds also needed to retain the documents for five years after the end of the fiscal year.

“These records must be kept in a form, with supporting documentation, to allow them to be properly audited,” he said.

The trustee must also appoint an independent auditor who, in turn, must report to the tax office if any wrongdoing is detected under the Occupational Pensions Industry (Monitoring) Act 1993.

“You can’t just provide an excel spreadsheet of the items to the auditor that you want to claim,” Mr. Chapman said.

‘You need to have original bank statements, expense invoices.’

An SMSF cannot be submitted until a report has been compiled by an accredited auditor.

Trustees who do not file a return face $275 for every 28 days after the February 28 due date, up to a maximum of $1,375.

Other things you can invest in

Self-managed superfunds can buy Australian and international shares, cash and term deposits, collectible artwork, commodities such as gold and fixed income products.

Australians running a self-managed superfund have until February 28 to file their annual return.