Mr Baker, who recently argued the latest ATO statistics show the SMSF sector as a whole is paying next to no tax, said SMSFs have an interest expense bill of around $375 million per annum.
“Interest expense may not be the biggest tax deduction for SMSFs just yet, but it’s the fastest growing,” he said.
But the $375 million figure is not the whole picture in respect of SMSF gearing and interest expense deduction,” said Mr Baker.
“The data covers only what appears on SMSF tax returns. It’s also common for SMSFs to achieve gearing outcomes by investing into internally geared unit trusts; such as private property trusts,” he said.
He estimated the overall interest expense for the sector is “in the vicinity of half a billion dollars”.
While gearing in super is “completely legal”, said Mr Baker, it means that more assets can be acquired; accumulation phase income is reduced or eliminated; franking credits and other tax advantages can be preserved or magnified; and a larger tax exempt capital gain can be achieved.
“[Gearing in SMSFs] is another force which means the prospect of the SMSF segment pulling its weight in terms of paying tax will keep receding,” he said.
“It’s another reason to equalize tax rates by imposing the 15% accumulation phase earnings tax rate on the pension phase too,” said Mr Baker.
“Taxing pension phase earnings would see SMSFs again make some contribution to tax revenues – there’s no fundamental reason why the pension phase should be tax exempt,” he said.
“It would also remove some of the undesirable distortions you see in investment strategies and structuring, such as increased gearing, when tax arbitrages exist,” said Mr Baker.
