Mailbag: incl. Is the index too sleepy to invest in? June 16, 2024

31:20If we saw the supply plunge even further, and frankly, it'd be hard for it to do so because it's already really, really low right now. If we saw a plunge, we could reinstate it for new builds if we wanted to. I wouldn't, but we could if we wanted to. If we get to the point we're going, actually look at what just happened supply fell off a cliff we need to fix it put it back on new supply if you want to do that if that's if that's what we're really after you could absolutely do that um i'm with ram i said to him off air i reckon negative gearing it's probably most of the there's been some papers actually somewhere between two and three percent is the is the believed impact on property prices now no one's got a no one's got a crystal ball so that's all guesswork yeah but probably something like that and that's you know is it good yes it makes property more affordable that that's a that's a good result if it felt 10 i'd be happier frankly um i own my own home do i want my home to be worth 10 less not really but do i think societally it's a great outcome absolutely i do because my kids and other people's kids are going to want to buy houses at some point by the way what changes to you serious question what what impact do you is there if your house drops 10 yeah i mean there's less for me personally if you're if you're an investor it does matter because your million dollar investment property is now with 900 grand that that's a real thing right so you're right welcome to investing i mean yeah that happens to shares it happens to anything it's just like it's not there this idea that it should never go down is just i think that's true laughable i guess i'm making then it's not an investment it's a it's a guarantee i'm making space the fact that investors won't be happy about it because i you're saying does it matter if it falls yes yes it does if i'm an investor i'm not saying you should be protected from it doesn't matter yes of course it matters if i risk risk equals return you don't get the upside without the risk of downside correct that just it's just how it is i i sorry i just i need to make the point because it just people are jumping off balconies oh my god the price might go well yeah i guess so and the same if you start a business the same if you buy some shares the same anything like welcome to investing but but but you care and it matters all i'm saying for those people as it would with shares or the business itself yeah okay sure do i care if the share price goes down yeah actually i really do do i have probably price goes down yeah i really do That's the only point I'm making.

33:24Yeah, but it's just not, I guess when it's always couched, there's something that is unfair or shouldn't be protected from or we can't allow that to happen. I agree. What? Okay. I agree. So yeah, Francis, there's the outcome. To your point about Ram's comment about, you know, what's the incentive on negatively yielding property for investors? I think that's kind of the point. I think that is the point, right? If there's no incentive, here's the other thing, right? I think I mentioned, you said, what are you missing? I think the answer is price has fallen because if there's no incentive, then investors won't buy them.

33:56And that's okay because people who want to live in them will buy them. It'll take demand away from the market, supply and demand. That'll make prices go down. That'll make more affordable for those that want to – because, I mean, again, newsflash, they're for living in. That demand will always be there, whether it's a renter or an owner. And all of a sudden, in the market, there will still be plenty of people who want to buy that house. It's just they might not be investors or let be less in. There will still be investors, but there'll be more owner occupiers. The shares equivalent is like saying, where's the incentive to own a company on a PE of 50?

34:35Yeah. And there isn't one. So if it fell to 15, I'd buy it. Yeah. Yeah. So that's the point. So, you know, is there incentive to own a PE of 50? No. So don't do it. I'd be very happy. If every investor said, this is stupid. That's cool. That's okay with me. I don't mind that. because by the way when they sell they're going to sell to somebody either another investor or owner or occupy that's the point the house still exists right exactly exactly alright I think we've smashed this one mate let's go to one from Frank who says dear pod machine operators which I like it's a bit industrial but I'm good to go with it your discussion on a potential housing crash and the wealth effect was thought provoking in my opinion says Frank the ideal solution would be for a long period of very low growth.

35:21Makes me wonder how many parts of our society are tied to house prices. Local councils are funded by rates linked to property prices. State governments rely on stamp duty. Federal government relies on capital gains tax. An aged care bed is generally funded by the sale of the home. And a loan for a small business relies on your house as collateral. Are there any other parts of society, asks Frank, reliant on house prices? So first thing I will say, Frank, i agree with you um the best outcome here is for we say very low growth i'd happily take stagnation but yes some some some long period where wages grew faster than house prices is the best solution for society you know a capitalist society um not everybody not every member of society uh but i think we should want to have i know you don't agree with this rem you'd be happy with you know a super long-term tenancy i i would suspect that if you're going to design a society somewhere upwards of 80 % owner-occupiers is probably about right.

36:18Not because I want to make people buy a home, but I think you'd probably guess that about that group want to. If you said, if you did a poll and said, hey, how many of you want to buy a home if you could? I reckon eight out of 10 people are going to say, yes, me please. And that kind of, again, this is weird, right? It sounds very communist or something, I don't know. But if you're going to have a society, the economy serves a society. So you'd start by saying, actually, what would you like the standard of living to be? Or I've said this about population before. What would you like to live in?

36:45if you'd like to live in a small apartment in the middle of cbd great let's make enough of those so those people can do it if you're saying well i'd like to live in a three-bedroom house um 25 k's out from the city but i can get there in 15 minutes let's do that like which the government's there just to literally give the people what they want um the economy is the result and so you know this is a bit of a tangent sorry frank but um at the end of the day that's kind that's kind of the point so society back to society um i i think you don't want to dislocate investors for the sake of it you know people lose money for the sake of it um frankly the political challenges are harder if prices fall we all know that so if i was going to get us out of this mess if i can use that phrase um i would do it i think by just you know stagnation or very low growth as you suggest frank me too i'll jump on that wagon that is just because i've i run a very serious risk of being i do not want property to crash like i do not want it as much as there would be some satisfaction and like come up and told you very reckless behavior not not a lot of people but certainly a reasonable minority of people um i don't want it right because it it it'll impact me and everyone in the country because housing housing is everything it is the foundation of so much of your family life if you don't have security yeah how are you going to study or get a job or razor like you just without that without that yeah there is nothing so it's super important hierarchy of needs we've known it for decades yep so so let's just go sideways yeah as long as we as we can until we get to a situation where an average person can have an average house without having to mortgage their entire future from there and their partner's entire future until they're 70 it's just it's madness and it comes down for all of the discussion france us about negative gearing at supply and demand.

38:33Government policies around, the government financial policies around tax, maybe if you're lucky, aggregate to 10%. But the growth in property prices over the last 30 years is way more than that. And so there is a, governments can do a lot, but I don't think, frankly, governments of both stripes have been in power, so it's not political. They haven't done a whole lot to really make that much of a difference, right? What they've done has been stupid. First-time buyers grants are dumb. Has it added to pricing pressure? Shout out to the Queensland government for trying that for the 50th time. Didn't work the first 49 times.

39:05No, it did. But I got a good... No, that's true. They felt like housing was more affordable because they had more money. That's how it worked, remember? That is very true. Housing affordability isn't about price, about how much money I've got for a deposit. It is. Anyway, yes, we're being facetious. Frank, I... Sorry, I cut off your train of thought. No, no, no, not at all. To answer your question about everything is the answer. Any other parts, I rely on house prices. To Ram's point, everything from shelter, but equally, I will say the wealth effect, It's overdone as a concept. But I guarantee you, if housing crashed 50%, we'd go into a deep, deep, deep recession.

39:35If for no other reason, we all stopped spending. Because the market would come down. Bloody hell, this is scary. Wages would come down. So everything is the answer. Directly, gee. I think you've probably nailed most of it. What else? I can't think of anything else. You've done a really nice job of summarizing the parts of it. I mean, well, house prices building builders. At some point, if house prices came down too far, by the way, builders couldn't build profitably. And that's the other part of the problem in terms of Ram's comment about, you know, supply and other things is you're only going to build if you can build, well, mostly anyway, if you build more cheaper than buying, right?

40:15You buy an established house. If it costs you$500 ,000 to buy an established house, $600 ,000 to build, you're going to buy the established house. And so at some point there is a, and frankly, a lot of builders have gone broke recently. building is not a particularly high margin business and at some level if prices of established drawings were to fall too far supply would stop dead because you couldn't afford well you could afford to build but you wouldn't know how to buy it so so there is a there is a relationship between the replacement cost of what you're buying and the price you're paying so just it just is um so building the building industry um reasonably important industry has lots of flow on effects across the economy so the building industry would probably suffer um in the big one you probably we did miss actually is just banking.

40:58I know they're not going to collapse. What are you saying? Tied to house prices. Banks lend most of their money for housing. And so if the housing growth stopped, profit growth would stop at the banks. Is it a big deal? No, but it's not nothing. And think about people who maybe, you know, bank dividends, for example. So it's a smaller impact, but those things as well. Any other stuff, Ms. Ram? We really have painted ourselves into a corner, haven't we, as a country? and this speculative frenzy. You go back and we had this incredible mineral endowment and the rise of China and it brought in a lot of money and we just punted it on houses.

41:36That's what we did. Did we strengthen the capital base, our productive capacity? Did we create a sovereign wealth fund? Did we do anything that had any long-term vision or did we just flip houses to one another and just gut any sort of intellectual capacity or, you know, it's just, it is such a tragedy. It's such a tragedy. It is. Yeah, I'm not sure. I'm not sure there's so what from your question, Frank, other than just a really interesting thing to think about. It's the best outcome. I'll explain. Let's take the other scenario. So we've talked about it crashing. No one wants that, even me. Sideways is the best.

42:18Well, what about just keep going up? Let's go with the old hackneyed phrase, double every seven years. Well, let's push that forward, right? What happens then? And again, you can talk about the point at which something breaks, but there's a line between. So at the moment, what is it in the capital city? Something like, depending where you are, it's like 10 times household incomes to get a house. It's like, okay, in a few years it's 15 and then it's 20 and then it's 30. It gets to a point where all of our combined economic efforts are not going into creating new things. It goes entirely into just being able to live under a roof.

43:01So we're not doing anything. We're the Easter Islanders. That's what we're doing. No one's growing any crops. We're all out there chipping away at these massive granite boulders, making a head that's bigger than bobs down the road. And then all of a sudden, one day, the civilization collapses. I know this sounds hyperbolic, but kind of that's what, if you really play it through for those going that, no, no, no, I want houses to continue to go up at that point. We actually do reach a point where the economy breaks because we are all just, just in a mad frenzy to support just something that we've had for 10 ,000 years, which is a house.

43:38Like how is it in this current age that that is, is just like all of our economic efforts, all our creative capacities, all of, you know, all of our entrepreneurial spirit is just not, we're just going to keep flipping to each other at these high. No one wins under that. It's a game of chicken. So you might win if you get out quick enough and flip into something that's actually got intrinsic value.

44:06I think that's right. I think the biggest, I don't know. I don't want to go back to the old population question or the kind of what's going on question. What worries me a little bit is the description you use on that is all about the way that we end up talking about as if the situation was a deliberate choice. You know, I think there's a difference between what I do deliberately, i.e. I choose to outbid you, you choose to outbid me. And that's true at one level. but if housing is always and ever a slow moving auction market then it's kind of not really i mean we can argue about cause and effect i suppose it's not really uh cause and effect or it's not really not really effect i don't think i think it's cause it's like you know what else what other choice do i have there's a limited number of houses there's a limited i can't live somewhere else but where else do i live where else is a vacant house that i that i don't want um if i go down i push someone down out of that market uh the the the housing prices i think are just got a net result of all of our expectations all of our desires combined but what is what is the alternative and i think plenty of people listening saying well hang on in this area there are this many people wanting this many houses if i don't buy it at this price someone else is going to but equally if i don't buy to that price i can't live here so i have to be further away and i think there is just something kind of a bit fundamentally economic about the way our house prices do represent we We talk about supply and demand so frequently, right?

45:34It's a supply and demand story. It's the real question about where do we stop? Where does, what would have to happen? And I've got to say, mate, I just think whether we want to add more supply, whether we want to reduce demand, and frankly, more supply is more dwellings, reducing demand is population. It just must be. And it's difficult waters. We've talked about this a little bit before, and I'm always hesitant to kind of make a big deal about it because I am pro-migration. I'm absolutely 100 % sure, and I would plead with anyone not to make this about the migrants themselves or even immigration itself.

46:07It's just pure population growth. If we had lower natural population growth, we'd have more immigration. It's not about the level of immigration per se. It's the total population growth and more technically, the rate of housing formation or household formation. If we had an empty house in every street, you watch the pricing become much more reasonable. You wouldn't have to outbid because you could outbid a lower price. if there's always another alternative. And that's, it's almost, you talk about regularly about opportunity cost. I just reckon that's kind of the story, right? It's literally, if I could buy my place for, I'll pick a million bucks, or the place is still for 800 ,000 at the same house, what am I going to buy?

46:43Of course, I'm going to buy the one at a lower price. If there are, take musical chairs, for example, right? Musical chairs is a fantastic game to play. It's a game that we end up saying, you know, you've got six chairs and five people. The game musical chairs never finishes because you've always got enough chairs. it's when you take a chair away or you add a person to the game that the maths gets really messy and the the the the idea of kind of how do you how do you square that circle you can't without prices going up so but what am i trying to say so let's let me summarize it at the end of the day it's a question really about what why are the prices why are the prices so high the prices are high because there is excess demand relative to the available supply if you flip that and say there's excess supply relative to the available demand, prices fall through the floor.

47:31Now, I'm not sure I want it to crash either, as you said, but somewhere in between that, which is, frankly, the idea of maybe balancing those out a little bit more reasonably, all we need to do is just make sure that we've dealt with supply or demand or both in such a way that if there's enough vacancies, prices fall because they can. I think that's, you know, why are we paying 11 times income rather than four times income? There is no reason. There was no, there wasn't a government decision. It wasn't a, i mean a little is it is it negative gearing a little bit is it capital gains a little bit is it the amount of money banks are lending us a little bit is it just because actually i want to live in a house and so do you and so we both stand next to each other and say who can afford to bid more that that's that's lit like it's it's you talk about markets in in action and market setting prices that's literally what's happened the problem i think and i don't want to be again i've just banged on about it i don't want to overdo it but i just think it's either we've got to put a lot more units of housing out or reduce the rate at which we're taking them up as i said i just i think the for me it's simply a the the metaphor or the picture is if there's an empty house in every street what happens to prices they probably fall by 40 percent now i'm not saying i want that to happen but what i'm saying is that's that's why we go from four times earnings to 11 times earnings i think it's yeah it's not well you and i believe that isn't an issue when there's two houses exactly because we because we're not going to our bid each other you get that one i'll Take that one.

48:54Right. You want to pay that much? Well, screw you. I'll go next door. Well, no, I want to go next door. Okay. Well, now we're bidding down the price to try and, you know, work out who pays the least to get in. That's how it should work. I mean, it's different. It's different for a house on the harbour, right? Correct. Because there is scarcity. Like, you can't, not everyone can have a view of the harbour bridge. Which is perfectly fine. Which is normal, right? Yep. Yep. But when you're in Mount Druitt paying$1.2 million for a fibro two-bedroom house, like, something is wrong there. And you have to.

49:22This is Western New South Wales. Western Sydney, by the way, for anyone who's not from Sydney. But why are you paying 1.2? Because if I want to be that close to see, I've got to pay that because someone else will if I don't. That's literally kind of, that's what I think it's... And again, it's partly government policy, sure. But government policy doesn't get from four times earnings to 11 times... Yeah, 400 times earnings to 11 times earnings. That's not... You can't do that. It's literally you and I saying, I want the house. No, I want the house. And the reason we do that is because there is no other house available.

49:51We're having to bid each other to live in that place. It's an indirect government policy in terms of planning. Correct. And population. Correct. Yes, exactly. And the trouble is there has been some response there. But we take all this beautiful farmland. We put these really badly built houses two inches away from each other in these cement. Overlapping leaves, yeah. Massive heat banks. It's like try harder, guys. You get some points for adding to supply, but you know it's completely out in the middle of no well i shouldn't when i say out in the middle of nowhere it's just because you haven't built any services and utilities around it there's one road in there's one road out there's maybe a massive westfield you know and that's it and and there's people live there because they have to right like it's sort of what we can we built cam camber was nothing beforehand camber is a beautiful place we built that yep there's a lot of places in regional New South Wales, we could, you know, it's a bit of vision, a bit of planning.

50:51We could really add supply and add quality supply that will underpin, you know, again, provide us the foundations to then get on with the business of doing real things in the economy. You give people attractive alternatives, they will take them. Or by the way, and the flip side of that is the same thing, which in reverse, it depends on what you think the role of government is, but ask people what they want. You know, if you want a certain dwelling and it's not available, then make it available. If they don't want it, don't build it and say, I'm sorry, you've got no choice. You've got to choose the house with the overlapping eaves or the tiny two-bedroom place for$1.2 million because there's only two options you've got.

51:32So, well, as a society, we need to be better than that, surely. Motley Fool Money. For more, subscribe to the free newsletter at fool.com.au forward slash listener.

51:46Sam sends us an email. It says, G'day, Scott and Rampage. Given how much you two rant, I'm surprised you haven't ranted about one topic yet. Or maybe I missed it. I think you did, Sam. But you know what? An opportunity to re-rant about something is always well and truly welcome. He says after re-ranting about property for the 50 millionth time. Exactly. Sam says, I'm talking about the Treasurer's superannuation changes, namely the$3 million cap that never gets indexed and the taxing of unrealized capital gains. I've seen the media report that for a current 30-year-old without indexation, this cap is equivalent to$1 million cap in today's dollars at retirement.

52:26As a 31-year-old, this policy alone has made me lose all interest in adding voluntary contributions to super, let alone what other changes might be on the horizon in the coming decades. What are your thoughts on these policies? Cheers, legends, Sam. So two things, mate. Firstly, the cap. Now, the cap is not a cap. It's a point above which taxes will be applied to unrealized gains. And then there's the unrealized gains themselves. Obviously, part of the same thing, but kind of separate. Because the question is, is it reasonable to tax unrealized gains? And if it is, at what level should that be done?

53:02Now, let me just quickly set this out, mate. Up to$1.7 million. This is indexed, by the way. The$1.7 million was$1.6 million. you pay no tax in pension phase when you're in superannuation when you retire between 1.7 and 3 million dollars unindexed according to the treasurer currently you'll pay uh 15 tax above that you pay i think it's pretty sure it's 30 of unrealized gains in other words if your shares go from 10 to 11 you're gonna pay 30 30 tax on that increase of a buck even if you don't sell them And I'm pretty sure it's the only part of our tax system that taxes unrealized gains in this way.

53:39What do you think, mate? We have read about it before. What do you think about those two concepts and how they should be applied to superannuation? I mean, the starters called it, right? Picked it like a dirty nose. We've said many times in this pod. It's the only reason I hesitate when speaking of voluntary contributions to super. Because they will change it. And they just have. And they will again, right? Particularly if you're someone who is in their 30s and you've got decades, as sure as the sun will rise in the east, they will change it. It is a massive honeypot for a fiscally irresponsible, not just a government, like all of them, right?

54:17So it's going to happen. I'm not surprised in the slightest. I do think there is a point at which, I mean, the whole point of having concessional tax treatment is to help incentivize and encourage it. And it's there to help take the pressure off the public purse to help people fund their retirement. So I'm all for that. That makes sense. But then there's a debate to be had. Where do you draw the line? Like for the billionaire that has however many hundreds of millions in super, do they need an incentive? And you go, well, everyone I think would go, no, that's ridiculous. Well, then where's the line drawn?

54:53And there is a reasonable debate to be had. So I don't want to get into any of that. Other than to say, I think it is reasonable that there is tax after a certain point. Like just to, I don't know, just pick a number. Don't at me with this specific number if you happen to disagree. But let's call it 5 million. And is it that unreasonable that someone with$5 million in super helps pay for the roads and hospitals and schools and stuff that they and their families are going to be enjoying? Like it's, you know, or does having that prospect of tax mean that all the stuff this I'm not going to use super at all?

55:34No, I mean, you're still going to do it, right? So I think that, yeah, I do think it needs to be, wherever that line is drawn, though, I think it needs to be indexed because then you get bracket creep and then you get a situation which might start as very, oh, here's a good example, stamp duty. Yeah. Right? So someone who just bought a home, I paid a lot of money in stamp duty. And you go, my God, that is an ungodly amount of tax to the state government. Now, when that was put in place, no one thought that very modest houses were going to be sold at these kinds of levels. And those people paying tax back then were extremely wealthy individuals.

56:14And, you know, we kind of thought that was a reasonable thing to do. Now it's just, you know, your average, even lower middle caste families are paying, you know, monies for houses that is just kind of puts that tax rate. It doesn't make any sense. I think if we were designing it now, no one, it would never get through if they sort of turned around and said, hey, we're going to make you pay$70 ,000 on your house. Like when you buy a house. And that's what happened. So it's not a problem now, but it will be a problem over time, I think. So I think it just makes sense to index it personally. um and finally i'm totally cool with them uh taxing my unrealized gains because surely they're also going to give me a refund when my shares go down so they actually will oh really yeah yeah that's that is oh my god okay it's insanity it's stupid um so can i go can you can you explain to me because i'm not well i can tell you what they're gonna do i can't i can't justify tell me what they get so sorry so in my super nice and clean i've got an etf in there yes uh a million dollars worth yes uh in one financial year it drops 20 now it's worth 800 000 so i just lost quote unquote it wasn't realized lost two hundred thousand dollars yep am i going to get a rebate on that apparently what i know i'm not sure if it's actually rebate or it may be carry forward like capital losses.

57:40But in either case, yes, the proposal is that you would pay tax if it went up and you would get a refund or a carry-forward deduction, I'm not sure which, if it went down. But either way, yes, over time, if you hold it for long enough, the losses and the gains would be both taxed or – So on an orbit around the sun, I'm going to put a line in the sand. That's what we're talking about here. It's like the time it takes the Earth to go around the sun. So it goes from$1 ,000 ,000 to$800 ,000 and then back to$1 ,000 ,000? Or a million to 1.2 and back to 100. 200 ,000 is the loss that year. Then it goes back to a million.

58:13So then now I've made a 25 % gain. So then I'm going to use the tax, be taxed on that, but then offset the other one. Or we could just have the rational, sensible thing of just like, there's no tax. At one point when you sell it, you'll pay tax then, which is super easy, I would imagine. And actually pretty reasonable too, because unless you sell it, you can't spend it. So it's kind of like, why are we taxing something? like it is stupidity it is absolute stupidity i don't know um i so yes sam we have ranted about it before um let me let me explain my thoughts and i'll explain what i think's going on um there is so here's the problem right we index some stuff we don't index other stuff so uh the 1.6 million dollar uh pension phase account is now is indexed and we'll go to 1.7 million dollars i think this financial year next financial year so that is indexed the reality is we don't index the income tax brackets though so should the three million index or not it's a good question um it is going to be um anomalous whichever way they do it if they don't do it then it's the same as the income tax brackets if they do do it it's same as the 1.7 million dollar pension phase maximum but in either case the the tax system is anomalous across the board so So, you know, and Jim Chalmers has said, look, it's up to future government.

59:37It is a stupid decision. It's a cop out. It's ridiculous. But nor do they index the income tax brackets. And you might yell right now, well, I should. I don't necessarily disagree with you. But my point is just that in this context, it is not the only thing that wouldn't be indexed in the tax system. So it's worth, and Stamp G, as Ram's already mentioned. So should they? Yes. Is it a horrible thing they haven't? Not in and of itself. it's like saying i'm not going to get a better paying job or i'm not going to get a career in a i'm going to get i'm going to be a janitor i'm not going to be a lawyer because in 25 years time i might earn 300 000 a year and i might get taxed 45 on that if i don't increase the tax brackets and it's it's it's the same it's you know it's annoying and i get that you want to kind of avoid it but it's not necessarily unreasonable um in and of itself in the sense that it shouldn't stop you from trying to maximize the value.

1:00:28I have, so yeah, would I like an index? Yes. Is it a massive issue for me? No, not yet. And I'll get back to why. The unrealized capital gains is absolute rank stupidity. And I don't say that lightly. I bet the accountants don't think so. I bet the accountants love it, right? It's just stupid. Because there's more work. It's more busy work to do, right? Yeah, it's so unnecessary. Two things. there is a uh it's a wealth tax by stealth and there are some on the left of politics i don't i don't say this as a pejorative term there are some who think wealth should be taxed and if you own a five million dollar house you should pay tax on that you don't pay tax on your million dollar house or you should tax land land generates no value if if land is being taxed without a realized income stream then you should in in in theory be able to tax superannuation without an income stream.

1:01:21The same is, it's true of both, right? And so there is a lot of, a heap of ideology here all caught up. And I don't, I can't unpack this easily because I don't know what Treasurer Chalmers is thinking or what Treasury has advised him. But if you're, my view is very, very, very firmly that we should tax the flow, not the stock, because the stock can't be easily liquidated. And so my absolute view is it should be on realized gains. It should be on realized incomes. That's what we've always done. It's what we should continue to do in my view. um now the other the other possibility is that you make having over three million bucks in super so um uh difficult and and unattractive that people take the money out of super into their own names in which case they get taxed at marginal rates rather than the tax shelter that is super and i suspect the latter is the reason they're doing it it's just kind of like we want you to have some money over and to your point rammy over a certain amount you should probably contribute and you should contribute a reasonable amount and if anyone's got five million bucks in super should they really be taxed only at 15 on the on the proceeds i mean think about the maths on that right you you earn five hundred thousand dollars you you taxed you know so sorry you're five million dollars you get 10 return you're five and a grand you pay 15 tax on that what's that 75 grand you're 425 thousand dollars left over that is way too light on a half million dollar income So I'm okay with taxing super more at higher balances or what I would prefer is higher incomes because, again, I think you should tax the flow, not the stock.

1:02:52And in which case, yes, super is a tax shelter. It is a wealth management tool. It is an estate planning tool rather than a retirement savings tool. Yes. No, no, no. It started off as a retirement savings tool. Yes, correct. It's morphed into a tax shelter. That's my point. Exactly. So it is that and it shouldn't be. Yes.

1:03:16So Sam, let me change rants for a second. I would solve this really, really, really, really simply. And no one's ever going to like this. This is why I'd never get to be treasurer, right? Here's what you should do with super. Super should be taxed, should be untaxed, up to$1.7 million worth of funding size, right? Give everyone every incentive to have enough in their super to offset the need for a pension. That's what it's for. So get there as quickly as you can. Once you're there, if it's 35%, 45%, 55%, 65%, 75%, you pay 15 % on the earnings above that. Once the fund's bigger than that, right?

1:03:50Because you've already got enough. There's no need for the government to give you a stupidly big benefit for doing so. And then when you take that money out, you pay tax at your marginal tax rate because it's an income stream. And that's just how it works. Now, you're paying 15 % on the earnings. Someone's being double taxed. Yeah, but you're not being taxed on any growth up to$1.7 million, and then you're going to complain about it after it? No, don't want to hear it. Thank you very much. So you do that. You put tax bill at their marginal rates, and here's the kicker. This is what everyone hates.

1:04:20Make them take out a minimum amount of their super every year and a maximum every year in retirement. Why? So you can't go and spend the money on a new yacht and a house and go take it to the casino and then go back on the pension. The whole idea of the system is to have enough to comfortably exceed the pension in post-tax income because hey who doesn't want a better standard of living and retirement than the pension everyone does so do that but then tax people on that and here's the why you've mentioned this before and i'm ranting i'll let you jump back in a minute the why is very very simple in my mind is we have a i mentioned this in a previous podcast we have a level of government spending that we as a society believe is the right level now we can argue about individually whether it should be higher or lower what program should be cut but for all intents and purposes when we elected the government we said these are your policies this will cost this much we will fund that with tax revenues that's what happened so the only question then is if we need i'm going to pick a number i don't know the number i should but i don't we need a hundred billion dollars worth of tax revenue a year to fund the government's spending right how should we collect that who should be paying some of it more than others less than others if you say to me someone who's a fiery who's on a i don't know they're on 90 grand a year paying a marginal tax rate of 32 two and a half percent or someone with five million dollars in super getting a half a million dollar retirement income and paying 15 and you think that's a reasonable share of the burden of tax revenue across the society i'm going to tell you you have your and i'm sorry you sam in particular here i'm going to tell anyone who says that they have their i don't know um i was going to say it wrongly tuned it's worse than that um that's you're just missing the point i i you know yes you've paid tax for your life yes you've saved i get a lot i get a lot again i'm not talking you sam because you're 31 you're young and i hate you uh but you are in a position where yeah if you're if you're retiring with half with a five or five million dollars of of super pay your bloody way pay your share of the government's costs based on your ability to pay don't tell someone on 180 grand they're gonna pay more tax in dollars and you're paying on 500 grand come on that's just madness so what i would do is i would say super is tax free up to that pension phase level taxed at 15 above that inside super taxed at marginal rates when it's taken out and the system works perfectly the tax collection is not hollowed out by the way frankincreds coming to this which is a whole different conversation i'm not going to go into that now because i've already ranted for too long but suffice it to say super is just a sink a sinkhole for tax revenues at a time when we don't have enough tax revenues to fund the things we're already doing you can say we should pay have less spending cool even if you do let's say you have government spending I'm still going to ask you, who should pay the bill?

1:07:05The fiery or the person with$5 million in super? It is a really, really, really stupidly simple answer. Yeah. Ram? Yeah. I'm just trying to absorb all of that. Sorry, mate. No, I mean, I kind of like what I hear. I tend to think that with any tax and spending debate, we always need to zoom out and take it at a system level. Yep. because tinkering at one level and then fixing something at another, that's why we ended up with the system we kind of got. Yes, exactly. Someone needs to stay. I mean, you're like, okay, we're just throwing everything in the bin and we're starting from scratch. How would you design a really good system?

1:07:46Perfect question. That's how I would do it. Soup is one part of that. So, yeah, I've got nothing to add there. It just, yeah, it does. We've just lost our way. Again, we've forgotten what the point of it for. the whole raison d 'etre was yeah yeah was was to help people say for retirement it's not correct the millionaires to shelter their assets it's just not and by the way the government isn't subsidizing this every other taxpayer is subsidizing it yes i'm paying more tax so the super anyone on with five million dollars can pay less tax and i'm not going to complain about that i'm doing fine right yeah but so is the nurse so is the teacher so is the street sweeper so is the factory worker they are paying more tax than they would have to for the current level of spending if people with more money paid more tax and you can't tell me that once you've covered the pension twice over pick a number i don't care you should be able to take money out tax free or tax only at 15 come on yeah i mean fair dinkum just don't i don't know how well i always think it's just like if it's that bad we'll swap i'll swap you know right like right it's like you know people won't do it anymore because the incentive's not there i will call that bluff any day of the week right like you in a heartbreak okay go on 90 grand a year and work a midnight shift in a palliative care unit like all right let's let's see how we go and and and pay less tax or is a whatever um however you want to frame it it's it's absolute nonsense you know if you're entitled to be selfish you're entitled to be selfish that's fine but don't pretend for a second it's actually a half decent public policy yeah if you've saved for retirement good if you're doing really well good if you're tax in your life great you've probably used some of those services during your life and if you haven't you've been really really really lucky and i'm glad for you i'm really excited for you that's wonderful i i hope all of us have that amount of good luck and and good outcomes but for the love of god don't try and tell me and again people say i don't want to pay my taxes the government should spend less fine let's say they spend less you still shouldn't be paying less tax than a fiery or a bloody bank worker or a like just don't just yeah oh it just grinds my it is ridiculous there is no there is no other than pure selfishness there's no justification for it and if you want to be selfish with a five million dollar super fund or three million dollars pick your number and again sam i know i'm going off on a tangent here mate you're right about the the um unrealized gains regardless of anything i've just said unrealized gains remains absolutely stupid um but you know just quickly actually i'll stop ranting back to sam's thing sam i get your worried about adding more to super i wish i could disagree with you um i would normally the problem with unrealized gains is you have to sell something to fund the cash flow at some point and so it kind of gets really hard at some point i mean if government doesn't index it and it does come down to a million bucks i mean it won't it'll stay above the um it'll stay above the indexed pension level either way so well i can't promise that i would i would keep adding sam uh you will pay more tax in future than you're paying now on your super almost certainly to ramps point but it almost certainly will be stupidly better than investing your own name in any of those circumstances right um if it's unrealized gains and you've got a property you're in trouble if it's unrealized gains you got an etf you can sell the units in the etf pay the tax bill as you go frankly you won't have to pay when you when you finally sell the product the the etf but even at that even above three million bucks you're paying tax at 30 percent uh if you had that in your own name and you had that sort of money you'd be paying tax at 40 well currently 45 depends what taxes change i i don't know any situation which you're worse off inside super than outside even with three million bucks even if it's not indexed so i'm not again i can't promise you that'll be the case in future will i change it again probably as i said i would change it again i would do it once and do it finally as you said ram start from first principles um you know super deserves to be incentivized up to the point at which it replaces the pension thereafter there's no requirement for to be incentivized because you can get the pension otherwise.

1:11:40Like there's no, you just take your money from other taxpayers. It makes no sense. Well, then you have a debate on how you tax capital gains outside of super, which is a separate conversation. Correct. That is about retirement, funding retirement. That's what it's for. That's what we, everything is framed in that. Outside of that, you go, oh, but what about this? What about that? Cool. It's a separate debate. This has got nothing to do with super, you know? Yeah. Yep. 100%. 100%. And again, it's simply always err on the side of simplicity, you know? Always err. Every year, I remember I said to you before, we interviewed the CEO of a large tax accounting group, and they just said every year it gets more complex, and every year that's good.

1:12:20I mean, it's not a conspiracy, but it's sort of, it's at the point where unless you've got a very simple financial setup, taxes are just the most painful thing, not in that you have to pay money to the government, Although let's face it, no one is super thrilled to do that for our own selfish reasons. But just because it's so difficult and cumbersome and hard. And it's like, I'm just going to go to an accountant to do it. And it's like, I don't know if we're actually creating value here when it is so complex that the average person has to employ the services of a financial expert once a year just to lodge that.

1:13:03But, you know, it's like how much money of that is productive, which could be directed into other areas of value creation for us and society. And just like it's a little bit mad. So, yeah, redesign the whole thing. Keep simplicity first and foremost. Even if there is inefficiencies in that as a consequence of the simplicity, I would still say, depending on where you want to put the slider, I still think that's beneficial because perfect is the enemy of the good. in so many different ways. Yes. And if there is some areas where it's not perfectly as good as you would like it, okay. But if it still saves hundreds of millions in wasted expenditure each year, it's probably okay, right?

1:13:46Yeah. So I'll do two things. Einstein's quote about making everything as simple as possible, but no simpler. Yes. Comes to mind. So you're not, people say, well, the simplest thing is a flat tax. And therefore it's like, well, no. Or simplest thing is no tax. Okay, well, we get silly at some point. So I would say simple as possible, but no simpler. Tax is theft as libertarians like to say I put that on I put that on Twitter the other day oh you're cool well someone well someone said it in reply and I just I just it got me so annoyed I did I don't like to sub tweet people but I kind of basically did I just put a separate tweet out so like if your response to any conversation of tax is tax is theft assume I'm going to block you or mute you because I just I can't there's no way to engage constructively with that if that's your view knock yourself out but I'm not going to engage with it which got what you do is just call it a society subscription and be done with it.

1:14:33It just changed the name and it was like, okay, cool. But also to your point of simplification, mate, let's be also really, really honest. The complexity only comes because people wanted tax breaks and the politicians gave it to them so they could get voted for. So none of this is necessary. It's not like someone said, this is the best policy. This is the best system. They went, oh, what if we did this and then we did that and then people would vote for us if we promised them that. Everything, every piece of this is, it's the diesel fuel rebate for miners. it's the superannuation perks it's the negative gearing change, sorry, a couple of gain stacks changed from the indexation to a discount right, it was all just to buy votes and fine, but don't pretend the system needs to be this complex for any reason other than the boondoggles were put in place to buy the votes of people who voted for these things, and others by the way on top of that, you take it, why did you take that, because just take it out it's not necessary, so you know when people say it can't be simpler, it's like it really can be It just depends how many votes you want to lose in the process.

1:15:31Yeah, yeah. I feel better. Do you feel better? Thanks, Sam. Thanks for asking the question, mate. It's a good chance to do some ranting. Mate, I reckon we're probably done here. Let's wrap this one up. Only though, as I've said before, if you'll come on Friday, will you rejoin me on Friday? Of course I will. I would absolutely hope so. All right. Enjoy the rest of your weekend, dear listeners. Or as Ramlox say, your Wednesday night or Thursday morning or Tuesday, you know, midday. because this is the pod machine and pod machines are... Maybe you're just a bot being trained on huge volumes of podcast data.

1:16:04Well, speaking of the scammers before, you'll know when my accent turns British, but we'll see how we go. All right, that's it. Have a great week and we will see you on Friday. Fool on. See you. The Motley Fool and people appearing in this program may have positions in the companies mentioned. General advice only. Please speak to your financial professional to understand how it may pertain to your situation. Subscribe to the free newsletter at fool.com.au forward slash listener. The Motley Fool operates under Financial Services Licence 400691.