Why mining tax repeal and SG freeze pose dilemma for professional financial planners

If you were hoping to find a thread of logic through the government’s scrapping of the minerals resource rent tax (the “mining tax”) and freezing superannuation guarantee (SG) contributions, you might have been disappointed. There’s better news if you were looking for a trend, but that trend poses an exquisite dilemma for a financial planner.

First, a brief recap: The mining tax was meant to target the so-called “super profits” created by the mining industry during the resources boom. The tax revenue was intended to fund future increases in the SG by making up the shortfall in government revenue that would come from more money going in to super and being taxed at a lower rate than if it were taxed as income in individuals’ hands.

All that is now off and the SG is frozen for the remainder of this decade, after another deal struck by the government with the Palmer United Party (PUP) and other minority parties to get its measures through the senate.

A ‘bad’ tax

The government says the mining tax was a “bad” tax (a typically erudite description) because it held back a sector that is important to Australia’s future, by restricting its ability to attract new investment and to create jobs. That’s the government’s stated rationale.

(One of the mining industry’s leading lights, Gina Reinhardt, is constantly talking about the need to lift productivity – that is, to do more work with fewer employees – so the industry’s credentials as a champion of employment growth must at least be examined more closely.)

The argument advanced this week was that if the mining tax went, the scheduled SG increases had to be frozen. But the logic linking all of this together is fuzzy, to say the least.

The mining sector doesn’t even employ all that many people, so employment growth in this sector, while desirable, isn’t exactly going to change the face of the labour force. According to the Australian Bureau of Statistics (ABS), as of November last year the mining sector employed about 277,000 people. A single company like Wesfarmers alone employs more than 200,000 people (some sources put the number at 220,000).

Wither investment?

And where will new investment in the mining industry come from? One source must surely be the $1.3 trillion currently held in Australian superannuation funds. Super funds are already significant investors in the mining industry, and this investment helps to underpin the sector’s growth and ability to create jobs.

The Financial Services Council (FSC) estimates the decision to freeze SG contributions will reduce retirement savings by $128 billion. Put that another way: Freezing SG contributions will reduce by $128 billion the amount that super funds have available to invest – including into industries such as mining.

If a typical super fund has, say, 40 per cent of its members’ funds invested in Australian shares, that’s about $51 billion of the $128 billion. An index weighting to the resources sector would account for about $17 billion.

Let’s say that again: Reducing the pool of super fund assets by $128 billion potentially denies the mining sector about $17 billion of new investment. Weigh that up against the savings the sector will gain by not paying the mining tax (which it apparently wasn’t paying anyway).

Impact on millions

At the same time, freezing the SG will have a negative impact on the accumulated retirement savings of untold millions of individuals. The precise impact varies according to an individual’s circumstances. The government argues workers will be better off because they’ll have more in the hand today; economists say that if people have higher disposable income and a choice between diverting some of that to compensate for the lower SG and spending it, about two-thirds will spend it.

The government can be cute and say freezing a future increase isn’t making anyone worse off, because they haven’t actually got it yet anyway, but it’s difficult to argue how knowingly and deliberately reducing the pool of national retirement savings by $128 billion can be said to be in the public interest. It’s hard to say how it can be in the mining industry’s interests either, but logic is not at the forefront of this decision.

Join the dots

If you start joining the dots between this policy decision – and if we assume there is a coherent thought process behind it – and other recent policy decisions then while the logic is sometimes hard to follow, there is at least a clear trend beginning to emerge.

The government is already under fire for framing a Budget adjudged to hit the least well off and most vulnerable hardest, and to caress high-income earners and the big end of town like a feather.

The government has now, for the second time in just a couple of months, explicitly put the interests of corporations ahead of individuals. When it came to changes to the Future of Financial Advice (FoFA) amendments, it also sought to put the interests of corporations ahead of individuals.

The dilemma

For a financial planner – at least, for any planner claiming to be a professional – the dilemma the whole thing raises is this: even if your personal inclination is to support a particular side of politics or a particular policy measure, if that measure cuts right across your area of expertise and is clearly not in the public interest, what do you do? Whose interests must you stand up for? And how do you stand up for them?

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