Why Every Government Will Increase Taxes on Superannuation

From Sam Volkering, 6 May 2016:

The fallout from this week’s federal budget continues. As I noted yesterday, it was a pretty weak budget all things considered. Nothing of any substance. Nothing to grab the reigns of the country and ride it to a sunny future.But there were some interesting tidbits in there — in particular some changes to the much-beloved superannuation system. An article in the Australian Financial Review yesterday caught my eye about said changes. The title reads: ‘AFR readers dismiss super caps as disgrace’.

Thems fightin’ words if you ask me. But I can see where the AFR readers are coming from. After getting a cushy ride with super over the last decade some people are asking, ‘why now?’If you had a wonderful tax-free environment to look forward to, and an easy way to pay considerably less tax, you’d be a tad annoyed too if it was taken away.

No wonder the (almost retired) masses are crying, ‘why makes changes now, right when it’s going to impact us? Why makes changes at all?’Of course, the reality is that, any time there’s a change to the super system, some segment of the public will be left worse-off than others.

If changes to superannuation caps weren’t this year, they’d be next. And the next crop of retirees would be saying the same thing, ‘Why now? Why us?’

But if you delay change every time someone asks ‘what about us?’ then nothing would ever change. Sometimes you’ve just got to suck it up and deal with it. Now that might sound a tad harsh. But most people forget that the superannuation system in Australia has done a lot of people a world of good. Well, mainly the baby boomers, in any case.

In reality, superannuation is the beast that got out of control.The stats don’t lie — but they’re a little unbelievable

Let’s take a quick look at the latest ATO tax statistics from the 2013/14 financial year (these are the most current). I touched on some other ATO statistics in yesterday’s Money Morning when looking at the number of people earning big bucks in Australia.

Today, though, I had a trawl through the ATO’s superannuation tax stats; in particular those relating to self-managed super funds (SMSFs).

Now, I appreciate the stats here are a couple of years old…but they’re not far off.Nonetheless, in 2013–14, there were 465,946 SMSFs. Compare this to 2009–10 when there were just 208,285. That’s a 123% growth in just a few years.In the 2009–10 financial year, those 208,285 SMSFs paid net tax of $2.19 billion. That was paid on taxable income of $14.67 billion. For simplicity’s sake, that works out at an average of $10,517 in taxes paid per fund.

Also, with some basic math, that gives an overall tax rate of just 14.92%.In 2013–14, 465,946 SMSFs paid net tax of $2 billion. And that was on taxable income of $13.49 billion. That works out to around $4,298 in tax per fund…Let’s also add the fact that every year the average balance of SMSFs continues to grow. In the 2009–10, average assets per SMSF was $811,595. In 2013–14, it was a whopping $1.06 million.

Say what? That doesn’t seem right does it? No, it doesn’t. But the stats don’t lie.Let’s run through that again: 123% more SMSFs from 2009–10 to 2013–14. And 31.3% growth in average assets per SMSF from 2009–10 to 2013–14. Yet…they paid less tax and made less money than three years prior.Oh dear. If you’re the government, that’s not how the system was supposed to work.

Think about superannuation as the government’s own stockholding. In fact, view the SMSF pool as one big company. Let’s give it the stock ticker ‘SMSF’.The government owned 208,285 shares in this ‘SMSF’ in 2009–10. And it delivered $10,517 per share. At this point the ‘SMSF’ market cap was about $189 billion.

Fast forward a few years and the government now owns 465,946 shares in ‘SMSF’. The market cap is now around $496 billion. Now, if the return (tax paid) to the government was even remotely close to what it was in 2009–10, then the government might be looking at net tax receipts of, say, $4.9 billion.

But that’s not the case now, is it? Nope. The stock now returns $4,298 per share. The stock has grown significantly, but the returns have not. Tax receipts are a trickle over $2 billion.

If you look at it from a purely investment point of view, the government’s return has been abysmal. Tax per fund has fallen by over 59%. That’s a poor return. If they could they’d probably sell this dud…But they can’t. They can’t get rid of it. So they can only do what they can do. And that’s change it.

After all, they’re trying to get better return on their investment….

What makes this interesting too is that, from 2012, funds in ‘full pension phase’ didn’t even have to report income on the SMSF return. That means actual income was likely considerably higher. But that means little really because, for the government, it’s about how much tax revenue they can generate from super.

If anything, with an increasing number of retirees and SMSFs in ‘full pension phase’, there’s an even bigger reason to start whacking on more taxes.

That’s exactly why this government — and every government from this day forth — will try to plunder the superannuation pool. They simply have to.

They have to tame the beast and get it to pay them back.

It’s an ‘own goal’ really. They’ve put all this work into superannuation. No doubt with the long term view it would pay them back. But it’s bit them on the backside. And keeping it the way it is, or making it a more tax-free environment is a dud economic strategy to follow.

That’s why you shouldn’t be surprised that they’re doubling tax on high income earner contributions… and why you expect contributions caps…and why more restrictions and regulations are coming.

You should expect more taxes. Expect more restriction. Expect the worst. The new reality is the super-gravy train is coming to a halt. The party’s over people.

From my view, the worst is yet to come. The whole $2 trillion beast that is the super system is out of control.

It’s a big, fat juicy tax target. And it might be the only way the country ever gets close to an economic surplus in the next decade or two…or three.

What can you do about this approaching storm? Well, what do you think? Be smart, hedge your bets. Something’s going to happen, and it’s coming fast. So you can sit idly by and watch it unfold. Or get ahead of the game and look at other ways to grow and protect your money for the most important person — you.

Regards,

Sam Volkering,

Editor, Australian Small-Cap Investigator

Ed note: This article was originally published in Money Morning.

Can’t see how government ever thought that creating a tax-free environment for super funds in pension mode was sustainable.

Source: Why Every Government Will Increase Taxes on Superannuation

Hat tip to Frank Aquino.

Plenty of bottom signals

Global

Dow Jones Global Index is headed for a test of resistance at 320 after penetrating its descending trendline. Respect of 320 is likely but a bottom is forming and a higher trough would suggest an inverted head-and-shoulders formation. 13-Week Twiggs Momentum recovery above zero is bullish but another low peak would indicate that bears still dominate.

Dow Jones Global Index

North America

The S&P 500 continues to test the band of resistance at 2100 to 2130. Money Flow remains bullish but I expect stubborn resistance at this level, further strengthened by poor quarterly results, so far, in the earnings season.

S&P 500 Index

A CBOE Volatility Index (VIX) at a low 14 indicates that (short-term) market risk is low. Long-term measures are also starting to ease but we maintain high cash levels in our portfolios.

S&P 500 VIX

Canada’s TSX 60 is headed for a test of resistance at 825. Penetration of the descending trendline suggests that a bottom is forming. Resistance is likely to hold but an ensuing higher trough would be a bullish sign. Rising 13-week Twiggs Momentum is encouraging but a low peak above zero would indicate that bears still dominate.

TSX 60 Index

Europe

Germany’s DAX broke resistance at 10000 and is headed for a test of the descending trendline. Rising Money Flow indicates medium-term buying pressure. Retreat below 10000 would warn of another decline.

DAX

* Target calculation: 9500 – ( 11000 – 9500 ) = 8000

The Footsie is headed for a test of 6500. Rising Money Flow suggests decent buying pressure. Respect of resistance is likely but a bottom is forming and an ensuing higher trough would suggest a primary up-trend.

FTSE 100

* Target calculation: 6000 – ( 6500 – 6000 ) = 5500

Asia

The Shanghai Composite Index retreated below 3000. Breach of medium-term support at 2900 would warn of another test of primary support at 2700. Rising Money Flow suggests that breach of primary support is unlikely.

Shanghai Composite Index

* Target calculation: 3000 – ( 3600 – 3000 ) = 2400

Japan’s Nikkei 225 Index broke resistance at 17000, a higher trough signaling a primary up-trend. Expect retracement to test the new support level at 17000. Rising Money Flow confirms buying pressure.

Nikkei 225 Index

* Target calculation: 17000 – ( 20000 – 17500 ) = 15000

India’s Sensex is testing its upper trend channel at 26000. Penetration of the descending trendline would suggest that a bottom is forming. Respect, indicated by reversal below 25000, would warn of another test of primary support.

SENSEX

* Target calculation: 23000 – ( 25000 – 23000 ) = 21000

Australia

A sharp fall in the Australian Dollar as result of record low inflation numbers may precipitate some selling by international buyers. Further weakness in iron ore would impact both the ASX and the Aussie Dollar.

The ASX 200 has also penetrated its descending trendline, suggesting that a bottom is forming. But bearish divergence on 13-week Money Flow warns of selling pressure. Retreat below 5000 would warn of another test of primary support at 4700.

ASX 200

* Target calculation: 4700 – ( 5200 – 4700 ) = 4200

Goldman Sachs ends a dismal season

Goldman Sachs (GS), last of bank heavyweights to release their first-quarter (Q1) 2016 earnings, reported a 55 percent fall in diluted earnings per share ($2.71) compared to the first quarter of last year ($6.05).

Net revenues dropped 40%, primarily due to a sharp 53% fall in Market Making and a 23% fall in Investment Banking. A 29% cut in non-interest expenses was insufficient to compensate.

Basel III Tier 1 Capital (CET1) decreased slightly to 12.2% (Q1 2015: 12.4%) of risk-weighted assets, while Leverage (SLR) improved to 6.0% (Q1 2015: 5.9%).

The dividend was held at 65 cents (Q1 2015: 65 cents), increasing the payout ratio to a still modest 18%.

We have had six heavyweights, JPM, BAC, WFC, C, MS and GS all report declining earnings per share. Most had cut non-interest expenses but insufficient to compensate for falling revenues and rising provisions for credit losses. The results reflect a tough environment.

GS is in a primary down-trend, having broken primary support at $170. Long-term Momentum below zero confirms. Expect a rally to test resistance and the descending trendline at $170 to $175 but respect is likely and would warn of another test of primary support at $140. Breach would offer a target of $110*.

Morgan Stanley (MS)

* Target calculation: 140 – ( 170 – 140 ) = 110

Morgan Stanley earnings fall 53 pc

Morgan Stanley (MS) is the latest bank heavyweight to release their first-quarter (Q1) 2016 earnings, reporting a 53 percent fall in diluted earnings per share ($0.55) compared to the first quarter of last year ($1.18).

Net revenues dropped 21%, primarily to a sharp 43% fall in the Institutional Securities (Trading) business and an 18% fall in Investment Banking. Non-interest expense cuts of 14% were insufficient to compensate. Declines were widespread, with Europe, Middle East & Africa (EMEA) (-36%) the worst affected.

Tier 1 Capital (CET1) improved to 14.5% (Q1 2015: 11.6%) of risk-weighted assets, while Leverage (SLR) improved to 6.0% (Q1 2015: 5.1%).

The dividend was held at 15 cents (Q1 2015: 15 cents), increasing the payout ratio to a still modest 27%, from 13% in Q1 2015.

Bob Doll’s newsletter this week says:

The uneven market uptrend in place since mid-February resumed last week, with the S&P 500 Index climbing 1.7%. The primary catalyst appeared to be better-than-expected corporate earnings results in the still-early reporting season, particularly from the banking sector. As a result, bank stocks performed particularly well, rising 7% last week, marking the best weekly gain in over four years. Investors also focused on better economic data coming from China and ongoing evidence that the U.S. economy is growing slowly.

We have had five heavyweights, JPM, BAC, WFC, C and MS all report declining earnings per share. Most had cut non-interest expenses but insufficient to compensate for falling revenues and rising provisions for credit losses. I’m afraid there isn’t much evidence of growth in the US economy and banking results reflect a tough environment. Beating earnings estimates doesn’t mean much if your earnings are falling.

MS is in a primary down-trend, having broken primary support at $30. Long-term Momentum below zero confirms. Expect a rally to test resistance and the descending trendline at $30 but respect is likely and would warn of another test of the band of primary support at $20 to $22. Breach would offer a target of the 2011 low at $12*.

Morgan Stanley (MS)

* Target calculation: 30 – ( 40 – 30 ) = 20

Goldman Sachs (GS) is due to report Tuesday.

The Fed Sends A Frightening Letter To JPM | Zero Hedge

From Pam Martens and Russ Martens via WallStreetOnParade.com:

Yesterday the Federal Reserve released a 19-page letter that it and the FDIC had issued to Jamie Dimon, the Chairman and CEO of JPMorgan Chase, on April 12 as a result of its failure to present a credible plan for winding itself down if the bank failed……

At the top of page 11, the Federal regulators reveal that they have “identified a deficiency” in JPMorgan’s wind-down plan which if not properly addressed could “pose serious adverse effects to the financial stability of the United States.”

How could one bank, even one as big and global as JPMorgan Chase, bring down the whole financial stability of the United States? Because, as the U.S. Treasury’s Office of Financial Research (OFR) has explained in detail and plotted in pictures (see below), five big banks in the U.S. have high contagion risk to each other….

….Equally disturbing, the most dangerous area of derivatives, the credit derivatives that blew up AIG and necessitated a $185 billion taxpayer bailout, remain predominately over the counter. According to the latest OCC report, only 16.8 percent of credit derivatives are being centrally cleared. At JPMorgan Chase, more than 80 percent of its credit derivatives are still over-the-counter.

Contagion and derivatives exposure….. two facets of the same problem. To me the question is: why are too-big-to-fail banks allowed to carry such high derivative exposure? Wells fargo (WFC) seems to be the only big bank who is not swimming naked.

Source: The Fed Sends A Frightening Letter To JPMorgan, Corporate Media Yawns | Zero Hedge

Citigroup (C) adds to banking woes

Citigroup (C) was the last of the bank heavyweights to release their first-quarter (Q1) 2016 earnings this week, reporting a sharp 27 percent fall in diluted earnings per share ($1.10) compared to the first quarter of last year ($1.51).

Revenues (net of interest) dropped 11% while non-interest expenses reduced by 3%. There was a modest 7% increase in the provision for credit losses (including benefits and claims). The fall in net revenues was largely attributable to a 27% decline in institutional business from Europe, Middle East & Africa (EMEA) and an 8% decline in North America. Consumer business also dropped in Latin America (13%) and Asia (9%).

Tier 1 Capital (CET1) improved to 12.3% (Q1 2015: 11.1%) of risk-weighted assets, while Leverage (SLR) improved to 7.4% (Q1 2015: 6.4%).

The dividend was held at 5 cents (Q1 2015: 5 cents), increasing the payout ratio to a parsimonious 5%, from 3% in Q1 2015.

C is in a primary down-trend, having broken primary support at $48. Long-term Momentum below zero confirms. Expect a rally to test resistance at $48 but respect is likely and would warn of another test of the band of primary support at $34 to $36. Breach would offer a target of the 2011 low at $24*.

Citigroup (C)

* Target calculation: 36 – ( 48 – 36 ) = 24

We have had four heavyweights, JPM, BAC, WFC and C, all report declining earnings per share. Most had cut non-interest expenses but insufficient to compensate for falling revenues and rising provisions for credit losses.

It looks like we are on track for a tough earnings season.

Iron ore taper | Motley Fool Australia

Mike King – April 15, 2016:

Chinese iron ore imports are….. soaring, thanks to the lower-cost, higher quality Australian and Brazilian product. Many of China’s steel mills are also located along the coast, making imported ore much more accessible than domestic mines located hundreds of kilometres away.

Those same steelmakers are also looking to substantially lower their costs in the face of subdued steel prices, and one way to do that is to replace lower-quality ore with the higher quality ore from Australia and Brazil.

The major miners, Vale, Rio Tinto Limited (ASX: RIO) and BHP Billiton Limited (ASX: BHP) are profitable at current prices, and the world’s fourth-largest producer Fortescue Metals Group Limited (ASX: FMG) has joined the party with C1 cash costs of below US$15 a tonne in the last quarter.

Gina Rinehart’s Hancock Prospecting is probably not too far away once it ramps up to full production at Roy Hill too.

…..There are still storm clouds on the horizon though, with Rio’s CEO Sam Walsh telling reporters in London that prices may fall in the second half of the year, with global output set to increase and offset improving demand from China. Research firm, Liberum Capital, has echoed others’ forecasts with its estimate that prices will fall below US$40 a tonne in the second half, saying demand had been “front-end loaded and will taper off.”

Methinks demand will taper over time while the surge in supply seems inevitable when Roy Hill gets going.

Source: Here’s why iron ore prices aren’t crashing | Motley Fool Australia

Bank heavyweight earnings slip

Thursday was a big day for earnings releases, with two bank heavyweights reporting first-quarter (Q1) 2016 earnings.

Bank of America (BAC)

Bank of America reported a 19 percent fall in earnings per share ($0.21) compared to the first quarter of last year ($0.26). The fall was largely attributable to a drop in investment banking and trading profits. Provision for credit losses increased 30% for the quarter, to $997 million.

Tier 1 Capital (CET1) improved to 11.6% (Q1 2015: 11.1%) of risk-weighted assets, while Leverage (SLR) improved to 6.8% (Q1 2015: 6.4%).

The dividend was held at 5 cents (Q1 2015: 5 cents), increasing the payout ratio to a modest 24%, from 19% in Q1 2015.

BAC is in a primary down-trend, having broken primary support at $15. Long-term Momentum below zero confirms. Expect a rally to test resistance at $15 but this is likely to hold and respect would warn of another decline, with a target of $9*.

Bank of America (BAC)

* Target calculation: 12 – ( 15 – 12 ) = 9

Wells Fargo (WFC)

Wells Fargo reported a 5 percent fall in (diluted) earnings per share ($0.99) compared to the first quarter of last year ($1.04). Provision for credit losses increased 78% for the quarter, to $1.09 billion, primarily due to exposure to the Oil & Gas sector.

Tier 1 Capital (CET1) improved to 10.6% (Q1 2015: 10.5%) of risk-weighted assets. No leverage ratio was provided..

The dividend of 37.5 cents is up on Q1 2015 dividend of 35 cents, increasing the payout ratio to 38% from 34% in Q1 2015.

WFC is in a primary down-trend, having broken primary support at $48. Long-term Momentum below zero confirms. Expect a rally to the descending trendline but respect is likely and reversal below $48 would warn of another decline, with a target of $40*.

Wells Fargo (WFC)

* Target calculation: 48 – ( 56 – 48 ) = 40

So far we have had three heavyweights, JPM, BAC and WFC all report similar performance: declining earnings per share despite deep cuts in non-interest expenses, partly attributable to rising provisions for credit losses.

Citigroup (C) is due to report Friday 11:00 am EST.

NYSE Short Interest Nears Record, Pre-Lehman Level | Zero Hedge

From Tyler Durden:

In the last two months, NYSE Short Interest has risen 4.5%, back over 18 billion shares near the historical record highs of July 2008 (and up 7 of the last 9 months). There are two very different perspectives one could take when looking at this data….

Either a central bank intervenes, or a massive forced buy-in event occurs, and unleashes the mother of all short squeezes, sending the S&P500 to new all time highs, or….

Just as the record short interest in July 2008 correctly predicted the biggest financial crisis in history and all those shorts covered at a huge profit, so another historic market collapse is just around the corner.

Else the S&P 500 oscillates between 2100 and 1800 for most of the year…. and the shorts keep climbing.

Source: NYSE Short Interest Nears Record, Pre-Lehman Level | Zero Hedge

Pros and cons of scrapping dividend imputation

From Matthew Smith | 14 Apr 2016:

In a low-growth economy — which we are in — any barrier to future growth is fair game to be considered for removal, so it should come as no surprise that Australia’s beloved dividend imputation system is the target of some debate.

John McIntosh, a private investor and doyen of the finance industry, makes the case for scrapping dividend imputation along these lines: If companies are incentivized to pay dividends it takes money away from what they might otherwise use to invest to deliver future earnings.

An already high corporate tax rate relative to the rest of the world means multinationals are using every trick in the book to avoid paying tax here, he adds. The government could reduce corporate tax by as much as 20 per cent if it was to do away with franking credits, he reckons.

McIntosh also says the dividend imputation system is harbouring a dividend paying culture which is distorting the decision making of our corporate executives.“If you have the confidence in a corporate executive, surely you’d rather have them manage the money rather than leave it in the hands of a funds manager who makes money from fees,” McIntosh, who was the founding partner and chairman of McIntosh Securities before it was sold to US investment bank Merrill Lynch in 1996, says in an interview with FINSIA’s InFinance.

McIntosh joins finance luminaries including Bill Ferris, a veteran venture capitalist and chairman of Prime Minister Malcolm Turnbull’s innovation and science advisory committee, along with other prominent VC investors who have been beating the drums for a review of the dividend imputation tax system.

…..One thing we know for sure, the JASSA article [by Andrew Ainsworth and Graham Partington from University of Sydney Business School Department of Finance and Geoffrey Warren from the Centre for International Finance and Regulation] explains, is the imputation system has encouraged higher dividend payouts – there’s a stark divergence in the dividend payout ratios for the Australian and world equity markets after imputation was introduced.

I am all for a flat tax system, with the same low rate (between 10 and 15%) of income tax payable by both individuals and corporations, which would make dividend imputation redundant (you simply make dividends exempt from tax). But, with the present system, it doesn’t make any sense.

Removing dividend imputation would certainly encourage large corporations to distribute less of their profits, resulting in large risk-averse corporations with bloated balance sheets. That is not a formula for growth. Quite the opposite. And when large corporations decide to expand, many do so offshore, either because they already dominate or face fierce competition in local markets. And apart from the patchy record that Australian corporations (not just NAB) have with international investments, offshore investment won’t generate local jobs or taxes.

What is needed is to remove the structural impediments to growth. Until we improve the tax system, over-regulation, labor practices, infrastructure, and bloated cost structures, Australia will struggle to be internationally competitive.

In Queensland we pay 35.378 cents per Kilowatt hour for electricity, or 27 US cents (AUDUSD at 0.76). The average price in the USA is 12 cents with some states as low as 8 cents. That is just one of many impediments to establishing competitive industry in Australia.

To attract industry we need to create fertile soil for them to grow.

Source: The pros and cons of scrapping dividend imputation