Super Changes Likely to Hit 500,000 Australians in Coming Decades

The market outlook for bonds and equities is strong, and investors can look forward to good returns on their super funds in coming years, according to Jenna Hayes, executive director of capital markets at Income Asset Management.

“Income assets, like bonds, will help manage a higher tax bill arising from Div 296 tax liability. In terms of corporate bonds delivering attractive returns, the recent Macquarie Bank and Melbourne Airport bonds offer good investment opportunities,” Ms Hayes said.

“The recently issued Macquarie Bank 10yr bond paying a fixed coupon above 6 per cent unsurprisingly saw strong demand. As interest rates fall and inflation continues to moderate, it’s a perfect time to lock in bonds paying strong fixed returns.

“The corporate hybrid market has exploded this year. We are seeing unprecedented demand from clients for this product, given the pick-up in yield over senior paper for strong investment grade issuers. Melbourne Airport is one example, which was well received by our client base”.

Hayes noted there has been a strong appetite for corporate bond issuance in recent months.

“We have seen bumper issuance in May and first half of June. There are too many to name, but our picks of the month are the bonds issued by One Rail Australia, Barclays, Next Era Energy and Melbourne Airport to name a few” Ms Hayes said.

“Issuers are milking opportunities in the corporate bond market. In terms of the big banks, we are likely to see less T2 issuance this year. But there is a lot of other corporate issuance and secondary opportunity for investors.”

According to Hayes, the Reserve Bank of Australia (RBA) is likely to cut interest rates several times this year.

“We are now within the RBA’s target inflation band of 2 per cent to 3 per cent and currently markets are pricing in a high likelihood of a July rate cut, with a cut 84 per cent priced in.  By this time next year, markets are pricing in four more cuts from the prevailing 3.85 per cent cash rate, but I think that is a little bit optimistic,” Ms Hayes said

“If these additional cuts eventuate, this means investors will be seeing even less income from their cash investments. That is likely to boost the appeal of corporate bonds for the reliable income they provide.”

Approximately 80,000 Australians who will face higher superannuation taxes on higher balances as significant changes to Australia’s superannuation system come into effect.

Superannuation account earnings for individuals with balances above $3 million are expected to be taxed at a higher concessional rate of 30 per cent, with that rate rising from 15 per cent on the portion of earnings attributable to the balance above $3 million. The changes are expected to be introduced in the coming financial year if the legislation passes through the Senate.

“While 80,000 people are likely to be immediately affected by this change, that number is forecast to grow significantly in coming years and it could rise to 500,000 in coming decades, so the implications of this change could be very broad,” Ms Hayes said.

“While these legislative changes were due to start on July 1, 2025, that will likely be pushed back because the legislation needs to be redrafted and go back to the new parliament. Still, we do have a lot of investors, especially high net-worth individuals, who are assessing what this change means for them. Some are considering taking money out of superannuation and putting it instead into defensive assets like corporate bonds, to avoid being charged that incremental 15 per cent on their super contributions where they have high balances.”

While the superannuation legislation had faced delays under the previous Labor Government, particularly over the taxing of unrealised gains and the non-indexation of the $3 million threshold, the passage of the legislation is now more likely with Labor’s increased Senate presence.