SMSFs appear to have escaped unscathed from the recent change of Government. There were no policy announcements that would directly affect SMSFs. Thankfully, Labour have abandoned the franking credit policy it took to the 2019 election which would have reduced the income of some SMSFs considerably. It is still early days however, so this does not mean that SMSFs will be ignored or forgotten by the incoming Government entirely.
Media discussions of tax in recent years have centred on personal tax and company tax. There has been little discussion on superannuation tax which currently receives very favourable treatment. Pension account income in an SMSF is tax exempt and accumulation account income is subject to a low 15% tax rate. Where a fund has both pension and accumulation accounts and the pension accounts are not fully segregated, the fund will still require an actuarial certificate to determine the proportion of income that is tax free.
As the new Government tries to balance its budget, it will most certainly start looking at all its sources of income and no doubt superannuation taxation will feature in the discussions. It could well decide to change the current tax-free status of pension income and the low tax rate on accumulation income. It is also likely that the Government will look at increasing the tax on superannuation.
Does the Government really need to increase taxes in general, though?
We have just passed a period of record Government spending and the latest Government budget has estimated that the national debt will shortly hit 1,000 billion dollars. This amount is far higher than any of our previous Governments’ debt. What this means is that there are far more dollars circulating in the community now than at any other time in Australia’s history.
Pumping dollars into the community during the COVID lockdowns was necessary to keep the economy going. With lockdowns now eased. People are starting to spend their extra dollars but it takes time for the economy to ramp up production and/or availability of the goods and services that people want to spend their extra dollars on. Until the supply of goods and services catches up with the demand, prices will rise as consumers compete for the limited range of goods and services currently available. As a result, inflation is on the rise, both here and overseas.
A method the Government can use to reduce inflation is to increase taxation. This works by taking dollars from consumers so they can't spend as freely thereby reducing the demand on goods and services.
While there is inflation, the Reserve Bank will increase interest rates in order to reduce it. As interest rates rise, fixed interest investments naturally become more attractive. Those with money to invest are more likely to move some of that money from the stock market to fixed interest investments in order to benefit from the increasing returns.
Unfortunately, as interest rates rise, the cost of borrowing goes up, and borrowing money to invest in the stock market becomes less attractive. This could result in a reduction in the return on SMSF investments in shares, in the short to medium term.