16 June 2017

Address to the SMSF2017 Summit & Investment Expo, Sydney

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It’s good to be here with you today to focus on the issues which I know are of most concern to you. When Ben rang me about a month or so ago now and asked me if I’d like to come along today, I was very keen to take up the opportunity.

I know you’ve got a lot of questions on issues, if they’re quite specific questions, then perhaps what we might do is get the specific details of those and we can take them away. My advisers are here and they can assist with that but more general questions we can deal with later.

This sector – the self-managed super funds sector – I think has been one of the most exciting areas of development in our financial services sector, in the way that people invest across this country that we have seen. It is, by your attendance here today and by the industry that has been established around the sector and its growth, I think, is proof of life, it’s proof of the dynamism of what is happening in this country when it comes to investment funds.

This is a sector where over 30,000 Australians are joining the SMSF team every year. Thirty thousand Australians who are preferring to be masters of their own destiny when it comes to how you manage your retirement incomes and not hand that over to, whether it’s the big bank funds or the industry funds or others, you’re making your own choices.

One of the great things about this country is there should be greater choice, not lesser choice, and that is certainly something that as a Government we want to facilitate and believe very strongly in.

So, I congratulate you on taking your choice to be masters of your own destinies when it comes to managing your own funds. But you’re not alone. SMSFs in Australia have grown by 86.8 per cent to reach 577,236 funds as of June 2016.

That means more than a million Australians are now members of self-managed super funds. In the year to June 2016, these funds received some $32.5 billion of contributions and that represented almost a quarter – 24 per cent – of the total contributions to the superannuation system in that year.

That is a considerable slice of the pie. That means the SMSF sector is not a fringe sector, it is very much a mainstream sector and a mainstream sector of how investment funds work in this country.

The sector now holds some $647.7 billion and there’s a median balance growing from around $493,000 to around $630,000 between 2011-12 and 2014-15. So, it’s growing, it’s working, it’s supporting Australians retirement incomes more and more so into the future.

But there’s another exciting statistic here, you’re all getting younger, you’ll be pleased to know. The median age for self-managed super funds has fallen from 55.1 years, I’m told, down to 48.4 – and soon it’ll be approaching Ben’s age any time soon as a group. I’m now well and truly in the SMSF age cohort.

But most importantly of all, 40 per cent of your assets are invested in our economy. They’re invested in Australian [inaudible] trusts, Australian shares, Australian managed investments.

In this year’s Budget, your success and your incomes through your investments are linked to the success of our economy.

As we know, the Australian economy over the last 26 years has had an extraordinary run. And there’s no reason why that run has to stop. There’s no reason at all.

It’s important that we accept that as an absolute opportunity and not resign ourselves as an economy that nothing can last forever.

If you keep making the right choices, if you keep doing the right things, if you keep heading in the right direction, you can expect that you’ll keep getting the right results.

So, as we look at the Australian economy – and as the Reserve Bank Governor and others have made very clear – we are well through beyond the 90 per cent mark in terms of the impact and decline of mining investment that has had a significant impact on our economy over recent years.

The terms of trade we’ve seen coming back up over the last six months or so, even though commodity prices have certainly been volatile – and you’ll be as aware of that, I’m talking to a room that probably watches the iron ore prices as regularly as I do as the Treasurer.

It’s important to understand that despite that volatility, despite the lumpiness of a lot of the data and the choppiness of what we’ve seen, and the headwinds the Australian economy has faced, the Australian economy still moves forward strongly.

It still remains, rightly so, one of the best places to invest in the world because there has been a stability and a resilience to growth in our economy.

Now, I put that down, frankly, to the resilience of Australians who refuse to be denied their prosperity despite the challenges that come; whether it was everything from the GFC or, before that, the Asian and financial crisis or the one in 100 year floods or the 30 per cent fall in the terms of trade in more recent times – all of these things, Australians as an economy, Australian businesses have continued to find a way through.

When an economy is really running, lots of people make money but the real success of an economy is when things are running against you.

That’s where it’s harder to make those gains. That’s where it’s harder to make those returns and while that is true for your funds, it is also true for the country and so in these times where we’ve continued to be able to grow as an economy – where other economies have lagged, where other economies have struggled – that I think is a real testimony to the Australian enterprising spirit and the way that the economy and those who drive it have been able to perform.

In the Budget, we continued our focus on growing the economy as the top priority, because without that your funds don’t grow, people don’t get jobs, revenue’s not raised to pay for pensions and welfare, and hospitals and schools and infrastructure and all of these things.

So, growth in the economy is critical.

You can’t assume growth, it must be earned, it must be driven, and that growth comes from Australian businesses.

Yesterday, we had some very strong figures on employment.

Now, it wasn’t the first month, it was actually the third successive month that we’ve seen a strength in the performance in employment in Australia – down to 5.5 per cent, the lowest level of unemployment in the last four years.

Lower, certainly, than it was when we came to office about just under four years ago, and we’ve also seen – whether it’s the NAB survey which is showing the improvement in business conditions or even in the National Accounts where 17 out of 20 industry sectors all showed positive growth even in that quarter – what we continue to see is a broadening of the Australian economy and its base, and that creates more diverse opportunities for investors.

Now, I want to see more funds – whether they’re SMSFs, industry funds or other funds investing obviously more in Australia, and particularly in the type of assets which are longer lived assets where I think superannuation funds are more likely to be drawn.

For example, in this Budget, what we announced is that we’ll be establishing the ability for management investment trusts to be used to build affordable housing in this country.

Now, those managing investment trusts will provide what is effectively a liquid vehicle for funds to actually go and invest in putting a roof over the heads of some of the most disadvantaged Australians in the country. And to do so in a way that produces a return because currently, the odds are stacked against those types of investments – either because there isn’t a liquid vehicle in which to invest to gain an exposure unless you go and buy the entire asset itself or because the returns have not been in a form that you could rely on.

Now, another thing we’ve done, just as an example, is we’ve negotiated with the states to ensure that welfare payments and Commonwealth rental assistance payments can now be direct deducted to landlords to ensure that effectively then if you’re the owner of an affordable housing dwelling or an investor in an affordable housing trust, the income is guaranteed by the Commonwealth Government effectively.

So, working on improving the income streams at the same time as creating the investment vehicles, we are working to try and open up more opportunities for funds like the ones you run or the larger industry funds or other funds to be able to invest in this infrastructure and partner with state and local governments and the Federal Government alike to deliver the infrastructure that Australia needs.

The infrastructure task is bigger than any government and it has always been the private sector in this country which has provided the lion’s share of investment in infrastructure. But the Commonwealth Government in this Budget has outlined a very clear and strong plan for investment in infrastructure to drive the economy. That, combined with the work we’re doing to lower corporate tax rates right across the board to drive investment, which means the companies you invest in as SMSFs will be paying lower tax in the future and the reason we’ve done that over a ten year plan with all corporates is to ensure that when those companies are making decisions, they can look at an investment horizon over the next ten years with certainty and know what the tax rate will be ten years from now.

The same is true in what we’re doing in trying to settle on a clear energy policy for this country which will deliver the certainty around investment for investment generation or any other aspects of the system.

For ten years, politics as usual on energy policy has delivered business as usual which has meant higher prices and less stability, less affordability and, ultimately, less sustainability.

What the Government is working on at the moment, off the basis of the Finkel report that came off last Friday, is to arrive at a position that will provide that certainty in the energy market that this country desperately needs.

To achieve that balance, politicians have to stop doing politics as usual on energy.

We have to meet in a place which is where the Australian people are and get on Australians’ side when it comes to what they need, and whether you’re running a small business or you’re investing in a fund or you’re paying your household electricity bill, you want the certainty and stability of energy pricing so you can make your plans for what you do in your own circumstances.

So, whether it’s energy policy, whether it’s tax policy, whether it’s investing in infrastructure, our trade agenda is broadly the frontiers of opportunities for Australian industry.

On top of that, the work that we’ve been doing in innovation and technology – only this week, I was able to report a 50 per cent increase in venture capital fund investments in this country and that followed the major changes we made to taxation for new start-ups and enterprise venture partnerships and capital gains discounts or early investment in those schemes which I’d encourage you all to look at closely.

All of this is what drives the economy forward and when that happens, SMSFs benefit from the returns that flow.

But what is critical to drive Australia’s growth is investment and you are investors in Australia’s future.

And I am confident about the better days ahead. Some seek to mock that. I don’t because when I meet with other Finance Ministers around the world, they’re seeing the same thing that I’m seeing and they’re seeing the global economy start to turn.

Now, that growth won’t just naturally fall to us, it has to be secured with the right sort of decisions which I’ve been outlining, and it’s important that we do that as a country.

The other point that I was going to make, before I turn specifically to some of the issues in super which I know you’re interested in, is in the Budget we continue to live within our means and that has ensured that after both this Budget and the Mid-Year Statement at the end of last year and last year’s Budget, we’ve continued to retain the AAA credit rating for Australia.

And we’ve been able to do that because we have consistently been able to land our projections into balance in 2020-21 and demonstrate a practical and clear path back to balance.

Now, much was made about where the level of debt is today.

Well, what I can tell you on the level of debt is that the net debt in Australia will fall. It will fall over the next ten years and it will fall from its peak of 19.8 per cent of the economy of $375 billion and that will fall to 8.5 per cent over the next ten years. And that will be achieved by getting the Budget back into balance and staying there – and staying there is the issue, and that means we need to continue to control the growth in expenditure.

Expenditure growth under this Government has been at two per cent – two per cent. To put that into some perspective, that is the lowest rate of expenditure growth on average of any Government in the last 50 years – 50 years.

So, for those who are concerned about the rate of growth in expenditure in this country, this Government has the lowest rate of expenditure growth on average of any Government in the last 50 years.

That is one of the reasons why we are able to get this budget back into balance projected for 2020-21.

There are other measures we’ve had to take in this Budget which I know you are aware of and the Bank Levy today is being discussed in Canberra – that is one of the issues we’ve had to move to get it back into balance and keep it in balance, and that’s why it remains as a structural measure, not as a temporary measure.

You can’t fix the Budget with temporary things.

You must fix the Budget with permanent decisions that permanently put the Budget back into balance and keep it there.

That’s the decision we took in this year’s Budget.

The other point I’d make on debt is gross debt beyond 2018-19 will continue to increase for three reasons in particular.

I’ve just told you that net debt is coming down.

Gross debt will continue to increase for three reasons. One, because we are funding $75 billion worth of infrastructure over the next ten years and that is being funded through debt. Good debt. Debt that’s actually investing in infrastructure that builds the country; runway by runway, road by road.

It’s investing in our defence procurement program, which is not just building our defence capability but it is transporting Australia’s high-value manufacturing industries and partnering with some of the smartest technology companies all around the world, to deliver that defence building capability.

So much of the innovation we see comes out of these types of procurements.

This is a massive plan that we announced in last year’s Budget and is being rolled out even now.

The third area relates to the Future Fund.

If we were to draw down on the Future Fund in 2021 then the purpose for which it was established would not be met.

The Future Fund was set up by Peter Costello to ensure that Australia’s unfunded superannuation liabilities would be fully paid for.

Now, under the law, I could start drawing down on that from 2021. Under tight financial circumstances you could imagine the temptation to do that. But we decided not to do that because if we touch that fund in 2021, it would all pretty much be gone by about 2037, but the unfunded superannuation liabilities will run to 2127.

If we do not touch that fund for ten years, and as a result, meet those commitments through those additional gross borrowings over the next ten years, then that fund will fully meet those unfunded liabilities out to 2137.

There aren’t too many decisions you get to make as a Treasurer which saves a century of taxpayers paying extra tax. But that one does.

So, when people say to me, why is the debt still going up at a gross level, that’s why.

We’re building, whether it’s building roads and infrastructure and ports, and runways and airports.

We’re investing in our defence capabilities, and we’re securing over a century of taxpayers by not raiding the Future Fund.

So those who have criticisms of us on gross debt need to answer those questions. Which airport will you not build in Sydney? Which Melbourne to Brisbane inland rail, will they not build that? Will they raid the Future Fund?

Your Government is not going to take those decisions. We’re going to build those things, and we’re going to ensure financial security.

Now, let me turn to the issue of the changes that are happening in superannuation.

I know this audience is pretty well informed. Your advisers certainly are and there is a lot of opportunity to go through that today.

What I particularly wanted to mention to you this morning, were these transitional arrangements.

Now, we must remember that the transfer balance cap is simply that.

It is assessed on the transfer into the pension phase.

After that period of time, your fund can grow, once it’s in its pension phase, to whatever your successful investment will lead it to.

The fund doesn’t have to remain below $1.6 million in perpetuity.

It’s like walking under a clearance height as you walk into a room.

If you clear that clearance height of $1.6 million then what happens on the other side is up to your investments and how they perform.

So, I think that is one of the common misunderstandings about the transfer balance cap, that is how much can go into the pension phase, at that point of transition, and what happens after that is totally up to you. How much it earns, and how much it grows.

Now, on the reporting arrangements, events that happen – now, those events are commencing a pension phase, transferring funds from the contributions phase into the pensions phase. Those events in the transitional year do not need to be reported until the annual tax return is lodged on the 28th of February 2018.

That means, basically up until the end of February, what happens between July and February all gets to come out in the wash in your tax return.

So, those monthly reporting requirements are not running in that first transitional phase because we know there will be a lot of things going on over that period of time.

But it will all come out in the wash in your tax return, and that means, if too much is being transferred then obviously different rates of tax will be applied to earnings on things above the cap, as you’d expect.

But there won’t be penalties that apply in that first transitional phase for having over transferred into that arrangement.

Now, the second one is, where there’s a commencement value of an income stream, this does not need to be reported until 28 days after the quarter in which the commencement occurred.

So once we get passed this first transitional phase, let’s say, you’ve transferred an asset, you might have a small shop, you might own an investment property or something like that, and you transfer that in. In the quarter that occurs, when that quarter ends, there is 28 days at the end of that period to conduct the valuation and to have that reported.

Now, you then don’t need to go and value that asset every month after that.

That is an urban myth. That is not necessary.

Once you have reported that value after that initial period, then that’s set. That determines whether you’ve got under the clearance height or you’re over it, and then you have to apportion it and then that value is the base on which that has been determined.

So, particularly for things involving rural property, or even transfers of shares for that matter, what you’re effectively doing is on those valuations, they happen in a quarterly reporting period and then you have 28 days after that.

Now, if you have another event, i.e. you’re commencing a pension phase, then you have to report back ten days after the end of the month in which that is occurring. These are the reporting periods.

So, I know there’s been a bit of confusion out there. And I think there’s been a bit of misreporting, but I don’t think in bad faith, these are complicated changes, and that’s what days like today are all about.

So, it’s important that we understand what those new cycles are in terms of the reporting.

Now it’s a little more complicated when it comes to the SMSF sector, because by definition the SMSF sector is tailored. It’s bespoke. That’s the point. That’s what you want. That’s what we want for you.

So these arrangements have been built into the transition to enable to get onto the new wicket, and to have a very clear understanding of that new wicket, and then you can go forward with the full knowledge of the rules.

The final point I’d make, is you’d be well aware of our position after the Murray Inquiry that we’re not touching the arrangements around limited recourse borrowing arrangements. That was the recommendation made to us, we haven’t been convinced there is an issue with this when it come to the SMSF sector, as a proportion of the investment property sector and the property sector more generally, it is quite small.

Obviously, if we thought there was malfeasance there or there was issue there which were creating problems more generally in the economy then we’d have a look at it, but there’s no evidence that has been presented to us to suggest that so the Turnbull Government has no plans whatsoever to change those arrangements.

We know that the Labor Party does, they want to strip those LBRA arrangements away from self-managed super funds.

So that’s a matter that is clearly before you to make determinations about.

The whole point of self-managed super is to have more options and be able to acquire assets and to provide for your future.

Obviously, people have self-managed super funds, not everything they own and not everything they do is through their self-managed super funds, your portfolios can extend beyond that.

So, we’re quite happy to see other areas of investment continue and we’ve ensured under the tax arrangements, particularly in the property market, that will remain as well.

What we prefer to do, is rather than get rid of negative gearing or things like that which our opponents in the Labor Party want to do, we’ve used the macro-prudential measures through APRA, which really can be demonstrated by what we are seeing, particularly in recent times, to be having the desired effect.

And we will continue to take a very careful approach when it comes to the housing market.

Why is that?

No one wins from a hard landing in the housing market.

Absolutely no one wins from a hard landing in housing.

That is why we have taken a very careful approach. We have seen a moderation in that market in recent times in Sydney and Melbourne and we have been very mindful of the fact that if you only think about the housing market of Australia in terms of Sydney and Melbourne then you do the investors in places like Perth, Adelaide, Hobart, Queensland, Townsville and everywhere else a great disservice.

As a Government operating nationally we are very mindful of that and that is why we don’t think using the chainsaw when it comes to tax arrangements around property is the right way to go.

You use the scalpel and you are careful about it, you are calibrated about it, you monitor it carefully and you tailor it to suit the circumstances and you use the most flexible tools available.

That gives a pretty good overview of where we are heading on both the economy and particularly some of these new arrangements.

The new arrangements are about making sure the super system is sustainable. That it is there not just for you, and not just for those who at 44, 42 which is about the age now that people are getting into SMSFs, it is going to be there for your kids, grandkids, great grandkids.

And you have got to have a set of tax arrangements that can support that with an ageing population and that is what we have sought to do.