Super changes turned people to property

INVESTMENT and Financial Services Association chief executive John Brogden yesterday blamed the federal government's changes to superannuation last year for prompting people to turn to investment properties for their retirement savings.

In an interview with The Australian, Mr Brogden said there was also a concern that there would be further cuts in the May budget to the caps on allowable contributions to superannuation beyond the compulsory 9 per cent superannuation guarantee levels.

He said concern about the Rudd government’s superannuation changes, following the surprise measures in last year’s budget and uncertainty about the federal government’s plans for superannuation, had encouraged people who had some extra savings to look for other means of investment, including investment properties.

“Cutting the cap on superannuation contributions and the prospect of it being further cut back in the budget means that people who want to top up their super before retirement will go off and find another form of tax-effective investment — including negative gearing on property investments,” he said.

Mr Brogden said it was the tax concessions that encouraged those people who did have some extra money to put away for their retirement to put in into superannuation in the hope of becoming self-funded retirees.

“We created a compulsory retirement savings system based on tax incentives,” he said.

“The more you tax those concessions away, the more you undermine the retirement outcome. It will be a very clear incentive for people to buy investment properties and negatively gear them.”

In last year’s budget, the government halved the voluntary amounts that could be contributed to superannuation in addition to the nine per cent superannuation guarantee levy from $100,000 to $50,000 for those over 50 and from $50,000 to $25,000 for those under 50.

This takes effect for the tax year ending June 30 this year.

The limit will be further reduced to $25,000 for those over 50 from July 1, 2012.

Mr Brogden’s comments come as Reserve Bank governor Glenn Stevens this week took the unusual step of going on national morning television to express his concern about rising housing prices.

While last year saw the advent of many first-home buyers taking advantage of the federal government’s first-home owner grants, real estate agents report a more recent return of investors into the market, adding to the pressure on prices.

Mr Brogden said people on low incomes would most likely depend largely on the pension to fund their retirement and the savings from the 9 per cent compulsory level, while those on higher incomes should be expected to provide for their own retirement.

He said it was important for those on incomes from $40,000 to about $120,000 to be encouraged to put in extra money into their superannuation savings so they would be less dependent on the pension in their retirement.

“You want to give them the signals and the tax incentives to want to top up their super and not to leave their super as it is and invest in others areas such as investment properties and force up property prices,” he said.

Rule changes take gloss off CBA profit

REGULATORY uncertainty has prompted analysts to downgrade Commonwealth Bank despite a 54 per cent lift in first-half profit and restoration of the dividend payout ratio.

Commonwealth shares rose 2.2 per cent yesterday, after being sold off by 1.6 per cent on Wednesday when Australia’s largest bank by market capitalisation recorded a $2.94 billion cash profit for the first half.

Citi analysts, however, cut the rating from a buy to a hold because of the increased regulatory burden expected to be imposed on Australian banks as a result of the global financial crisis.

Citi banking analyst Craig Williams cut Commonwealth’s target price from $60 to $56.50, while other analysts questioned the premium that it trades at compared with its Australian rivals.

“It’s quite hard to fault the result,” Mr Williams said.

“While the ship may maintain operational momentum for a while, regulatory clouds seem likely to prevent the share price from going likewise.

“The management statements around regulatory intervention confirmed the prospect of ongoing elevated capital and liquidity requirements is increasing — the potential for capital returns in 2010 look to be diminishing.”

Commonwealth chief executive Ralph Norris warned the government that Australian institutions did not require the increased regulatory red tape expected to be applied to the world financial system.

The most likely regulatory change is a requirement that the banks hold more capital and liquid assets, a move that bank bosses in Australia have warned would lead to higher costs.

The Basel Committee, considered a global banking regulator, has proposed banks hold enough cash to cover 30 days of business, compared with the current five-day stipulation.

Goldman Sachs JBWere banking analyst Ben Koo said Commonwealth was trading above the valuations of its peers, especially with a 15 per cent 2011 price-earnings ratio premium.

Choice praises bank changes

THE consumer organisation Choice says new hardship provisions to be adopted in the banks’ code of conduct demonstrate “a real commitment” to helping customers deal with financial difficulties.

The organisation’s senior policy officer Elissa Freeman said the updated Code of Banking Practice contained 12 separate recommendations “around the ways banks should deal with financial hardship, and that’s a very positive improvement”.

“Customers will certainly have a much clearer understanding of what to expect when they are dealing with banks on this matter,” she said.

“In the past, banks didn’t have good processes in place to manage the issue and, to be fair, most have been working to improve that situation.”

Ms Freeman said little progress had been made on other issues, as the Australian Bankers Association adopted a “wait and see approach” to the federal government’s reform program on consumer credit and unfair contract terms.

ABA chief executive David Bell said the banking sector had “accepted the vast majority of recommendations” made by Jan McClelland in her independent review of the industry’s voluntary code, completed last December.

Ms McClelland urged the banks to embrace a “clear commitment to responsible lending”, including careful assessment of applications for credit that may result in financial hardship and a more proactive approach to helping customers who find themselves in trouble. Mr Bell said some recommendations had been overtaken by the government’s reform program.

Goldman chief calls for pay changes

THE chairman of Wall Street firm Goldman Sachs, Lloyd Blankfein, said that the anger over bank compensation programs and bonuses was “understandable and appropriate” and that multi-year guaranteed employment contracts “should be banned entirely”.

Lloyd Blankfein in Frankfurst yesterday Picture: Bloomberg

Tick for changes on share schemes

WOOLWORTHS has described the amendments to the federal government’s proposed tax treatment of employee share schemes as a “step in the right direction”.

On Friday, the Rudd government succumbed to an industry backlash against its $200 million crackdown on employee share schemes and modified its May budget measures by allowing the income threshold for a $1000-a-year tax exemption to be raised from $60,000 a year to $150,000 a year.

As part of the new arrangements, employees will also be allowed to defer taxation on option and share schemes where there is a genuine risk of forfeiture, but the government has also flagged it plans to review the existing valuation rules for shares and options.

The government has invited public submission on its consultation paper and draft legislation of the tax treatment of employee share schemes. Interested parties have until Friday to lodge submissions.

A spokesman for Woolworths yesterday said “we’re still going through the detail but we believe it’s a step in the right direction”.

Wesfarmers, one of a number of companies to suspend its employee share scheme, said it was still reviewing the discussion paper and declined further comment.

Among other major Australian corporates to reportedly suspend their employee share schemes were Westpac Bank, National Australia Bank and fund manager Perpetual.

Additional reporting: Nicola Berkovic

Andrew Main — Page 25

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