K Rudd magic & why the mining super-profits tax is a superannuation tax

Troughs, pigs and magic taxes - photo by Perfektionist on Flickr licensed under Creative Commons
My utmost admiration for the government on the Miner’s Super-tax. There’s a true symmetry to this which just has to be mentioned.

It’s called a Super tax because it’s a tax on ‘Super-profits’ in the mining sector.

But of course the beauty of it is that it is really also a tax on the superannuation (‘super’) savings of most Australians (the impact on project starts, jobs etc is well covered elsewhere).

A mining tax on fat cat mining companies, that’s fine isn’t it? Well mining companies make up 20% of the ASX market cap.

Let’s assume that BHP’s share price fall from the date of the announcement on May 2nd as a big diversified miner is a proxy for the fall in the mining index associated with K Rudd’s new super dooper tax. As of today (4 weeks later at June 1st) it’s fallen about 10% (from $71 to $64).

So any Australian’s superannuation portfolio which mirrors the ASX may have seen that fall about two percent (10% of 20%) to the extent that it mirrors the ASX 100.

How much is Mr Rudd going to get from that tax – well Ernst and Young had it at about $9bn per annum.

Some fairly old Wikipedia estimates of the Oz market cap put it at 1.39 trillion (yeah I know these figures are really rubbery but you get my drift).

2% of $1.39 trillion (that’s 13 with 11 zeros after it) is the market cap decline because of this tax or $26 billion.

But hey it’s not that bad because 40% of the market is owned by furriners (we don’t need them to buy in and support our market!) who we don’t care about so the market might only really have declined for Australian shareholders as a result of this tax by $15.6bn (60% of $26bn).

And Australian superannuation fund holders only hold part of the market owned by Australians (maybe 80% if we assume they mostly hold domestic portfolios) so maybe Australian collective super funds are down by $12.48bn.

Now we could go on but I can see you are yawning –  it’s not over yet because the tax revenue only comes in about 2 years time (2012) and that nasty forward-looking market seems to have made the money disappear now – so you’d have to discount cash Mr Rudd is not going to see for at least 2 years. On the other hand you could argue that some of the fall relates to Europe and not K Rudd.  Anyway I’ll stop here  …  you can see where this is going.

Magical huh?  A tax that is supposedly applied to fat cat miners turns out to really come out of Australian worker’s pockets, and makes a net $3.5billion just disappear (after you net off a -$12.48bn decline in national super holdings and $9bn in tax revenue on the plus side in 2012).

Poor Mr Rudd huh? Things you can do with a nation’s savings and a publically traded stockmarket are not the same as what you do with your own household budget.

 PS. I do not hold a position in ANY mining stocks (don’t understand them). And if you want more accurate figures go get ’em – mine are only based on some crude estimates and an hour’s work in Wikipedia (a dodgy website that the government needs to filter out presumably).

Posted under Risk

This post was written by mike on June 1, 2010

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Legislative risk – or “I’d rather have the cash now thank you”

Whether you put money into a SIPP or SMSF, in the back of everyone’s mind is the question (especially with voluntary contributions) of whether it makes sense to lock your money up in this way.

In Australia the point comes to the fore more with voluntary contributions as superannuation is compulsory at 9% of salary (so it’s not as if you have a choice on salary as to whether you contribute or not).

The Australian government made contributions compulsory in 1992 – if ever the UK government does the same buy an index fund or better still buy stock in a fund manager – estimates put the ‘new’ savings engendered by this move in Australia at 62c on the dollar.

The key point is obviously that you cannot access the money contributed to pensions/super until ‘preservation age’ (in Australia 60 years of age for most people who are not close to retirement).

Want to take the holiday of a lifetime before 60 on this money – you can’t.  Want to give a lump sum to a child – you can’t.

There are some exceptions for hardship, so if you’re starving in a garrett at 55 you will probably be able to get access to your super before preservation age, but that’s about it. If you die relatively young (although it would have to  be abnormally young – average life expectancy in Australia is now about 80; for the UK it’s 78) this could prove seriously annoying.

Some other more governmental / political risks might be:

  • between now and your retirement the government in its wisdom decides to change preservation age. In 1997 the Australian government pushed back the ‘preservation age’ by a whole 5 years from 55 to 60. Presumably the thinking behind this, as with much of the government’s rationale, was to stop people cashing in their super relatively early and then relying on State benefits in the later stages of life. What are the chances of this happening again? Probably relatively high…. But bear in mind that last time they did it they ‘tapered’ the results so that those close to the previous preservation age could still obtain most of their superannuation at close to the old figure of 55 years old
  • the government decides to change the tax rate on super from the current 15% level (in Australia). However if they did this it would be unlikely to be retrospective so it would only affect ‘future’ income and not the balance you had already built up. You could hope that perhaps you would be able to transfer the fund offshore and still retain the benefits but who knows. Against this you need to balance the significant difference in tax rates on money in super funds and money outside super. At the average income in Australia (around $49,000) you are paying a marginal tax rate of 30% for everything over $30,000 and 40% over $75,000. Against this, a tax rate of 15% for money in your super fund looks pretty attractive (if at some stage of your life you’re earning less than $30,000 it might be worth keeping your money outside a super fund – you pay the same tax rate of 15%).

A perhaps more common scenario is where a new investment opportunity arises which if you were not self managing your super/pension you could not take advantage of this because you were constrained by the options on offer from your managed fund.  With the new ability to even buy property in a fund there is a lot of freedom, although you cannot borrow, so if you are fond of margin lending to finance your share portfolio you can’t do this in a SMSF. All in all though, having a self managed fund does not greatly restrict your options, assuming you are a relatively conservative investor.

Posted under Risk, Setup

This post was written by mike on September 13, 2008

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