By Matthew Cranston
Negotiations between the Greens and Labor over the budget tax bill have hit another hurdle, with the left-wing party demanding the removal of limited recourse borrowing arrangements in self managed super funds and raising concerns about big business benefiting from the new capital gains changes.
The Greens – in return for their support for the budget tax changes – have been demanding that a record number of ministerial discretions embedded in the tax bill be removed and clarified within the law before it was passed such as what government payments allow someone to be exempt from a new minimum 30 per cent CGT.
Jim Chalmers last Thursday backed down on the level of ministerial discretions, saying the government would iron out key areas of the bill, which many independent tax and legal experts said had been rushed.
The Greens then went further demanding a longer inquiry into the $37.8bn in savings to be gained from cuts to the National Disability Insurance Scheme, which they oppose, in exchange for passing the tax changes.
The Australian understands that the party and its treasury spokesman Nick McKim are now actively demanding changes to limited recourse borrowing arrangements within self managed super funds, and have been concerned about the benefits flowing from the new CGT rules for big business.
The Greens declined to comment on both aspects of the negotiations being led by their treasury spokesman.
As he aims to get his tweaked tax changes past the parliament before the winter break, Anthony Albanese denied in question time that he had backflipped on key planks of his budget.
“What we’ve done is what we said we’d do on the budget night … Consult widely,” the Prime Minister told parliament.
“We made it very clear that we foreshadowed Treasury’s discussion paper. It was all there for all to see.
“But, of course, for those who were busy hyperventilating and saying they were opposed to things before they even saw legislation. They didn’t look at that detail.”
Some Labor MPs last week privately questioned why the small business exemptions and start-up carve-outs were not unveiled in the budget, arguing it would have saved the government from taking such a battering over the broken promises on tax hikes.
The Greens have wanted changes to limited recourse borrowing for several years and the Treasurer is understood to be considering the change.
In a report into the rushed Senate inquiry last week, the Greens included a minor but important mention of what they called a “budget loophole’ for self managed super funds.
“The Greens also hold significant concerns that as a result of these changes, people will flock to Self-Managed Superannuation Funds (SMSFs) as the remaining vehicle able to purchase tax-advantaged residential properties,” the report said.
“Since the budget there has been a surge of social media advertising that encourages people to ‘turn your super into a property portfolio’, advertising SMSFs as a ‘budget loophole’ and explaining ‘why SMSF is now king’.”
“Superannuation funds are generally prohibited from borrowing to purchase assets because it increases financial system risk. However, in 2011, SMSFs were given an exemption, enabling limited recourse borrowing arrangements (LRBA) to purchase property,” the Greens’ section of the report said.
Limited recourse borrowing allows retirees to lend money to businesses, but if that business defaults, the lender can only claim the underlying asset, protecting the borrower’s other assets from seizure.
The Greens mentioned how previous inquiries into the financial system such as that by former Commonwealth Bank chairman David Murray raised issue with the rate of growth in limited recourse borrowing.
“We can’t kick this can down the road any more. Now that lead-generators are using social media to push the dream of home ownership through SMSFs, these unique arrangements must finally be closed,” the Greens said in the CGT report last week.
SMSF Association chief executive Peter Burgess said, SMSFs shouldn’t be used as a scapegoat to address perceived risks.
“SMSF borrowing arrangements have been in place for many years and have been scrutinised time and time again without any finding of significant systemic risk. Reopening this issue now, simply to address perceived federal budget risks, would be a disappointing and disproportionate response that ignores the facts and targets the wrong problem.
“If the real concern is property spruikers, then that behaviour should be tackled head-on rather than unfairly targeting SMSF investors.
“With a review already underway into lead generation and aggressive sales practices, it makes little sense to rush into policy changes before the evidence has been properly considered,” Mr Burgess said.
As part of Labor’s tax changes announced in the budget, Dr Chalmers wants to remove the 50 per cent discount on capital gains in favour of an inflation index model coupled with a minimum 30 per cent CGT.
The Australian reported that top 20 biggest companies will be the main beneficiaries of Labor’s new capital gains tax treatment, as investors shift out of high-growth stocks into high-yield ones because of how the inflation indexation system works with a minimum 30 per cent CGT.
While company profits taxed and delivered as dividends come with franking credits for investors, retained profits that lift the share price and the capital gain do not come with tax credits.
Combined with the minimum 30 per cent CGT, this leaves the highest income earners with an effective 63 per cent tax rate on realised gains. Fund managers said this would push investors into low growth high yielding stocks for which the highest yielding in the ASX 100 are oil and gas companies.
The Greens have objected to this in the past and have raised concerns.
Wilson Asset Management chairman Geoff Wilson said the changes will make it easier for large companies to dominated new and growing businesses.
“The result is greater concentration of economic power in a handful of established corporations. If the Greens are concerned about corporate concentration, competition and economic fairness, they should carve out Australian businesses,” Mr Wilson said.
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