Category: Newspaper/Blog Articles/Hansard

Why the superannuation contribution cap is still a big trap

Australian Financial Review

5 July 2018

John Wasiliev

Over the past decade being penalised for exceeding superannuation contribution limits has been a major risk for members of super funds not aware of these important restrictions.

Even though a new set of rules has been introduced with changes to these limits, the July 1 start to the 2018-19 financial year has brought with it a continuing risk of having to pay additional tax.

The key reason, says superannuation legal expert Daniel Butler, of DBA Lawyers, is because super’s contribution rules continue to be far more complex than they need to be, creating ongoing risks for those who are not familiar with them.

The unfortunate circumstances surrounding retiree Colin Ward, featured in The Australian Financial Review last month, are an extreme example of someone caught by making excess contributions, given the $209,250 tax penalty he suffered. This penalty was imposed in 2010-11 for breaching the after-tax (or non-concessional) contribution bring-forward rules.

But Ward was just one of more than 100,000 super taxpayers hit with excess contribution tax that raised more than $550 million in revenue, according to Australian Taxation Office (ATO) statistics quoted in a 2014 review of excess contributions by the Inspector-General of Taxation.

His case continues to be topical because after unsuccessfully exhausting various legal avenues to have the penalty overturned – the most recent to the Administrative Appeals Tribunal arguing that special circumstances should have existed that allowed the tax office to disregard them or allocate them to another year – legal experts came up with a new suggestion: applying to Assistant Finance Minister David Coleman for an “act of grace” government payment as a way of recovering his super.

Opening the floodgates

While this is certainly a course of action he could pursue, says Graeme Colley, an executive manager at self-managed superannuation fund (SMSF) administrator SuperConcepts, it might be difficult. If it’s successful, there is no reason why many others could not make a similar claim.

Although his contributions were made to an SMSF, excess contribution penalties have claimed numerous “victims” in all types of super funds. The contributions have been controversial because sometimes it has only taken a very small amount of excess to lead to a significant tax bill due to the complex calculations that can be involved. There was one case before the changes in mid-2013 where a $10 excess amount gave rise to a tax liability of over $70,000. A taxpayer triggered his bring-forward rule by going over his limit by only $10.

Butler says the main thing highlighted by trying to argue for special circumstances treatment of excess contributions is how strict, inflexible and complex the law that enforces this area not only happens to be, but also continues to be.

While there have been changes under new legislation that came into force last July 1 – such as the reduced entitlements to make both before- and after-tax contributions – the overall complexity of the contribution rules bewilders him. Butler has been working in the superannuation and tax area for more than 30 years and considers most people would not understand the complexity of the rules – even most ATO officers.

The new rules, he says, are still far too complicated for what is needed and should be more reasonable, especially when it comes to entitlements that seek to correct honest mistakes.

How the rules work

So what are the new rules? The just completed 2017-18 financial year and the new 2018-19 financial year will see the concessional contribution limit set at $25,000 while the after-tax or non-concessional limit (also described as the non-concessional cap or NCC) is four times that, or $100,000.

Where the concessional limit exceeds $25,000 – which could be from a variety of sources like an employer (or multiple employers) and salary-sacrifice contributions you may choose to make – such amounts can be paid back to you as taxable income with a 15 per cent tax offset that recognises the tax deducted when the super went into the fund.

One complex aspect of excess contributions , says Butler, is that where you recognise you have made a mistake you can’t just withdraw the money.

If an excess concessional contribution amount is made, the intuitive course of action might be to withdraw this as soon as possible. But doing this could result in you being penalised on the grounds you have withdrawn money from your super when you were not eligible to do so. In order to withdraw money from super, it is stuck there until you have satisfied a “condition of release”.

A condition of release when you exceed a concessional contribution is a release authority from the ATO. Butler describes this authority as a “get out of jail card”.

The release authority is a mechanism that allows you to withdraw money from your super – especially important if you have to pay tax at your marginal tax rate (including the 2 per cent Medicare levy) on the amount of any excess contribution. This can be reduced by a 15 per cent tax offset.

Follow the protocol

If by mistake you have made excess concessional contributions, this is how the system works: you have to wait until the member’s annual tax return and the tax return for the super fund have been prepared and then assessed by the ATO. Where an excess has been picked up, you will then get an excess contributions determination notice and a release authority.

Where you elect to have the excess released, you can have up to 85 per cent of the excess concessional contribution withdrawn but 100 per cent of the excess amount must still be included in your assessable income for the financial year the contribution is made. The election is irrevocable and must comply with certain requirements. If an SMSF is involved, the fund’s trust deed must allow the excess contribution release authority system.

At the same time you are personally entitled to a 15 per cent tax offset on the excess amount.

One point to note about a liability for an excess contribution is that a special excess concessional contribution charge also applies. This interest charge of about 5 per cent begins on the first day of the financial year and ends on the day before tax under the individual’s first notice of assessment for that financial year is due to be paid (or would be paid if there were any to pay).

Failing to make an election to have the excess contribution released and paid back to you will see this amount not only taxed as excess income but measured against your non-concessional contribution (NCC) cap – in essence, the same amount is double counted.

Where your NCC cap happens to be nil because your total superannuation balance on the previous June 30 was above $1.6 million (members with more than $1.6 million cannot make any further NCCs), you face the prospect of paying tax at 45 per cent tax plus the 2 per cent Medicare levy on the excess amount. How excess NCCs will be taxed under the new rules will be the topic of my next column.

john.wasiliev@fairfaxmedia.com.au

AFR Contributor

Major reversal for SMSFs in property

The Australian

30 June 2018

James Kirby

Australia’s love affair with property might just mean a major reversal is going to hit the flourishing world of self-managed super funds as a new area of scandal looms in financial advice.

We know already that financial advice standards across the market are appalling and we also know that property prices are falling.

But it is only this week we found out that most new investors joining the SMSF sector are doing it to buy property.

Unfortunately, many of these investors are being lured into the area by unscrupulous advisers who have links with property companies.

An ASIC report says 90 per cent of financial advice given on opening SMSF funds is not compliant with the law. It also adds that one in five investors is at risk of what they politely describe as “financial detriment” through bad advice.

Let’s put all that another way: there is now evidence from the regulators that people are being lured into SMSFs by the worst sort of advisers in the market.

At its most appalling, the advisers are doing it to make themselves richer and the investors are left with their entire life savings in a single property investment that is probably third-grade.

It’s a recipe for disaster often among the very people who really would be better off having someone else manage their money.

But let’s make one thing clear — the problem here is not aspiring investors, it is the advisers.

It’s not that self-managed funds are a problem per se … or even that SMSFs can legally put all their eggs in one basket.

Rather, the problem building rapidly is due to two issues:

  • Property returns have been so good for so long that investors believe it cannot be beaten as an asset choice. As ASIC explains, new investors see residential investments as “a safe bet”.
  • SMSF member numbers have been growing apace for years, now that they have reached the one million mark it may be a natural plateau in a wider population of 25 million

SMSF funds really only started exploiting the rules, which allow them to borrow to buy property since 2009, when the banks began to create tailored products in the sector.

Though the rules are restrictive and the proportion of SMSF borrowing remains small, the attention paid to the area has been intense … and most of that attention has been negative.

In defence of property borrowing in SMSFs, perhaps the best argument is that SMSFs can already invest in everything from hedge funds to bitcoin, so why not the house next door?

But crucially these SMSF investors must be well advised … what is happening is the very opposite.

The SMSF association, which defends the right of investors to borrow for property, suggests advisers must be made to do a specialist SMSF course as part of their qualifications; this would be a useful start.

But the danger right now is that the enemies of SMSFs — and they include most of the big super funds, both retail and industry — will use this ASIC report to lobby for a total ban on geared super in SMSFs.

Big funds hate losing members to SMSFs: they argue that SMSFs need to be protected from themselves; this is the very same line of thinking that makes investors go solo and start SMSFs in the first place.

In his recent Financial System Inquiry, David Murray — who is now chairman of AMP — recommended that borrowing be banned from SMSFs.

The government accepted a range of Murray’s report recommendations but ignored his advice on borrowing in super.

Separately, in the recent Productivity Commission report on super, the issue of borrowing in SMSF funds was given an effective tick of approval with the commission finding no substantial concerns.

Any adviser who can add two and two together will know that an SMSF should be diversified. If they have property it should be a part of a portfolio along with shares, funds, alternatives and cash. If borrowings are made to buy the property the repayments have to be worked out carefully.

Perhaps not every SMSF aspirant knows this but the wider community of SMSF operators should not be penalised for it.

The SMSF sector is in a mature stage of growth — it has been pilloried throughout this past year by larger funds, it has been hampered continually by a range of governments, most recently by the Turnbull government with a huge crackdown on both contribution limits and the introduction of tax on pension income.

Once again it becomes clear the sector has few friends and property borrowing in SMSF is now in serious jeopardy with a damning report from a powerful government regulator.

In a stroke, ASIC has just handed the big super funds a weapon to push their case again in Canberra.

The crucial point is that borrowing for property in a SMSF is perfectly reasonable when done by the book — it is perfectly dreadful when done under the eye of a charlatan adviser in league with a property developer.

Super funds placing $100bn-plus in high-risk instruments

The Australian

30 June 2018

Anthony Klan

The nation’s prudential regulator has called on superannuation funds to “review and restructure” their cash investment options, after it found many were improperly investing the money in higher risk products such as funding mortgages.

The Australian Prudential Regulation Authority said its investigations into the $100 billion-plus of the public’s money held in super as “cash” — sparked by an expose by The Australian — had found numerous funds were instead investing that money in other areas, including commercial bonds and “hybrid debt instruments”.

“Assets that APRA has observed forming part of cash options’ underlying investments include asset-backed and mortgage-backed securities, loans and other credit instruments,” APRA deputy chairwoman Helen Rowell wrote to the trustees in the nation’s $2.6 trillion super industry.

The regulator would not disclose which funds were targeted, but it is understood the problem went beyond a handful of outliers, prompting the public action.

Yesterday’s announcement is the first of two components to APRA’s investigation into super cash investments. The regulator will continue to investigate why many super funds, including funds operated by the nation’s four biggest banks, were paying returns on cash investments which were as low as a quarter of market rates.

The second component of the investigation is more important because that gouging is collectively costing millions of super savers hundreds of millions of dollars a year while the misallocation of “cash investments” was actually increasing returns, albeit by introducing slightly more risk.

As revealed by The Australian in April, the major banks are paying returns of as low as 0.5 per cent a year on cash — in the case of at least two ANZ funds the annual returns on cash have been negative — despite the market rate being about 2.2 per cent.

On May 30, fronting the Senate Economics Legislation Committee, Mrs Rowell was questioned about those revelations, which showed people with super funds owed by the big four banks were collectively losing hundreds of millions of dollars a year in the fee gouge, and about whether APRA was concerned.

“Yes, we are,” Ms Rowell said.

She said the regulator had launched an investigation and found some funds seemed to be “returning much less” on cash investments than “what you would expect”.

She said APRA had also found some funds were delivering higher returns than “we would expect from what you might call a pure cash option”, which led to yesterday’s announcement.

Some banks, including ANZ, have argued the returns they are paying on some super investment options are much lower than the market rate, and lower than the banks are offering in term deposits to the general public, because those deposits were “at-call”.

This argument was rebuffed by Financial Services Minister Kelly O’Dwyer, who told The Australian she did not accept that long-term investments such as super could be classified “at-call”.

Most industry super funds provided returns on cash investments in line with the market rate. Returns on cash investments for super funds operated by the major banks were almost all in the lowest quartile for returns on cash.

Despite this, The Australian has revealed super funds run by ANZ, Commonwealth Bank and NAB for staff members and their families are delivering returns on cash in line with market rates, and in line with industry funds.

Rates of return on “cash” for members of the NAB’s staff super fund averaged

2.54 per cent a year for the past five years, after adjusting for tax, about 6½ times more than what customers received from the public version of the same product.

APRA declined to comment on which funds it was targeting, or when it expected to report on the second stage of its investigations.

Investment property may help elderly dodge contribution caps

The Australian

30 June 2018

James Gerrard

Baby-boomers, take note: tomorrow marks the start of the downsizing rules that may help you sidestep the ever-shrinking superannuation contribution caps.

But in what will come as a surprise to many, investment property may be eligible for the $300,000 downsizing super contribution under certain circumstances. But beware: if you do not follow all the rules you may end up with a hefty penalty from the Australian Taxation Office.

Announced in last year’s federal budget, the downsizing measure was aimed at those over 65 and retired who otherwise could not contribute to superannuation because of the work test requirement. The federal government also wanted to encourage older Australians to sell the family home, which might be too large given the children had left home, and to free up stock for younger families who were starting out.

Under the downsizing measures, the key requirements are:

  • You must be at least 65 at the date of contribution.
  • The property contract of sale exchanges after July 1 next year.
  • The property was owned for 10 years before sale.
  • The proceeds must be at least partially exempt from capital gains tax under the main residence exemption.
  • The contribution must be made within 90 days of settlement.
  • It is a one-off. You cannot use this on multiple homes.

In a departure from the government’s rhetoric on transitioning the elderly from their family homes to the actual wording in the legislated bill, the downsizing rules do not exclusively apply to people’s primary residence.

Under certain circumstances, investment property can be sold and up to $300,000 per spouse can be contributed into super from the proceeds.

On review of the Treasury Law Amendment Bill 2017, in the wording of the 10- year minimum ownership section, there is no stated requirement to have physically lived in the property continuously for a full 10-year period. Rather, it refers to having “held” an interest in the property over the 10 years.

There is, however a requirement that the property was lived in as a main residence for at least some of the 10-year period. The ATO summarises the relevant section of the Treasury Law Amendment Bill 2017 on its website: “The proceeds (capital gain or loss) from the sale of the home are either exempt or partially exempt from capital gains tax under the main residence exemption.”

In other words, as long as you lived in the property as your main residence at some stage (which triggers a partial exemption under the main residence exemption), that property is eligible for the downsizing provisions. In fact, you could have lived in the property for six months as your main residence, then rented it out for the next 9½ years, and still be eligible for the downsizing contribution on the proceeds of sale.

This is the case even if you subsequently purchased another property and moved into that as your main residence while still owning the first property, which you later claimed the downsizing provisions against. But you can’t do it on both properties: it’s a single-use rule.

Looking at some of the other requirements, it can be easy to inadvertently mess up in the process. Selling and buying property is usually the biggest financial decision most people make. Sydney buyer’s agent Shamren Odisho says: “After selling the family home of over 10 years, it may take a few months to find the new property to purchase, and in some instances people may go travelling or rent a property before re-entering the property market.”

In these situations, people may feel it’s best to hold off making the downsizing contribution until they know how much they’ll need to spend on the new property. But if they hold off for more than 90 days after settlement of their home, they’ll miss the window to contribute into super under the downsizing rules.

ATO has conveyed that it may apply “false and misleading’’ penalties, which run into the thousands, for contributions made under the downsizing provisions after 90 days.

But in practice it usually won’t be necessary to hold off putting money into super until after the new property is purchased.

From age 65, money in super is not preserved, meaning that even if the full $300,000 were contributed into super under the downsizing rules, it could be accessed, in full, at any point without restriction as a tax-free lump sum.

The prudent approach would be to keep the money contributed from the proceeds of the family home in a cash option within super until the new home was purchased, at which time it would be known if any of the $300,000 needed to be withdrawn to cover the cost of the new property, or whether the money was then free to be invested in super.

For many, the downsizing rules provided flexibility in what had become a stiff and rigid retirement savings system during the past 10 years. And whether it was intentional is yet to be seen, but it appears the scope of properties that fall within the downsizing rules is larger than first anticipated, including not only the family home but also investment property that have been lived in.

James Gerrard is the principal and director of Sydney financial planning firm

www.FinancialAdvisor.com.au

Banks to stick with ‘grandfathered’ advice charges

The Australian

29 June 2018

Anthony Klan

Most of the nation’s biggest banks will continue charging about 500,000 customers hundreds of millions of dollars a year in so-called “grandfathered” commissions, fees and charges despite those charges being made illegal for all new investments five years ago.

Long-term customers of CBA, ANZ, NAB and AMP financial products will continue to be charged the fees, despite Westpac’s BT last week saying it would stop the practice, which was allowed to continue after requests for a “transition” period when the 2013 laws were introduced.

The other big three banks and AMP — which earns as much as 70 per cent of its financial advice revenue from fees and charges carved out of the 2013 reforms — all confirmed yesterday that they would not follow Westpac’s lead.

The Productivity Commission’s recent draft report into the superannuation sector earmarked those fees, which occur mostly in the form of “trailing” commissions paid regularly to financial advisers, often years after any advice was actually given, to be a serious cause of super “balance erosion”.

The commission estimated there were more than 630,000 accounts nationwide that were affected by trailing commissions, which “can materially erode member balances”.

Westpac’s BT Financial Advice Group surprised the market last week and said financial advisers working for companies owned by Westpac would no longer charge trailing commissions and would wind back grandfather payments, benefiting “more than 140,000 BT Advice customer accounts”. People who were invested in BT products who had received advice from “external” financial advisers would continue to pay trailing commissions. BT said the moves would cost it about $40m a year before tax.

In light of tightening regulation and the growing awareness of the large fees charged by financial advisers for little or no service, Westpac is the only one of the major four banks that is expected to retain its “wealth management” business. Its announcement this week was seen to be a move by the bank to be noted as trying to improve its image, and to act before the royal commission into financial services makes its recommendations.

The CBA on Monday announced it would sell much of its wealth management business and float it on the stock exchange, and so was unlikely to take any steps to wind back lucrative trailing commission revenues so as to maximise the sale price.

When asked whether CBA would also ban grandfathered fees, a spokeswoman said demerger would involve a “large portion of its wealth management and mortgage broking businesses to create a new, separate financial services company”.

An NAB spokeswoman said the bank “regularly reviewed” its commissions. An AMP spokeswoman said “grandfathered commissions will continue to diminish through attrition”.

An ANZ spokesman said the bank was “operating to the requirements of current legislation”.

“Should the government or the royal commission put forward any proposals in this area, we will obviously examine them closely,” he said.

Strategies to reduce your total superannuation balance: Part 2

Joseph Cheung (jcheung@dbalawyers.com.au), Lawyer and William Fettes (wfettes@dbalawyers.com.au), Senior Associate, DBA Lawyers

An individual’s total superannuation balance (‘TSB’) determines many of their superannuation rights, entitlements and obligations. Accordingly, there is a strong incentive for individuals to carefully monitor their TSB over time, particularly towards the end of a financial year (‘FY’) when most TSB thresholds are tested.

In part 1 of our series on moderating the TSB, we discussed the various components of a person’s TSB and examined how making pension payments and/or lump sum payments could reduce a member’s TSB, subject to certain provisos. In part 2, we examine paying arm’s length expenses.

(For more detail about the various TSB thresholds, please refer to the following link: https://www.dbalawyers.com.au/contributions/total-superannuation-balance-milestones/.)

Strategy #2: Pay arm’s length expenses

Naturally, paying fund expenses using fund resources can reduce an individual’s TSB. Some common and accepted expenses incurred by SMSFs include, but are not limited to the following:

  • the SMSF supervisory levy;
  • investment-related expenses, such as brokerage and bank fees;
  • accounting fees to prepare and lodge the annual return for the self managed superannuation fund (‘SMSF’);
  • audit fees;
  • actuarial services;
  • operating expenses such as management and administration fees; and
  • annual review fees for a corporate trustee.

However, it should be borne in mind that inappropriate outgoings or expenses could be problematic for superannuation law purposes, including under:

  • the sole purpose test
  • the payment standards;
  • the prohibition on providing financial assistance to members and relatives; and
  • the arm’s length rule in s 109 of the Superannuation Industry (Supervision) Act 1993 (Cth).

Additionally, payment of an expense which is less than an arm’s length amount could enliven the non-arm’s length income (‘NALI’) provisions in the Income Tax Assessment Act 1997 (Cth) under the ATO’s current administrative practice to NALI. Moreover, it should be noted that the proposed rewording of the NALI provisions in the Treasury Laws Amendment (2018 Superannuation Measures No. 1) Bill 2018 will make the application of NALI to an expense which is less than an arm’s length amount much clearer, even where the amount of ordinary income or statutory income derived by the trustee of the SMSF is the same as might be expected in terms of arm’s length dealings.

Another relevant rule that must be considered is reg 5.02(3) of the Superannuation Industry (Supervision) Regulations 1994 (Cth). Regulation 5.02(3) requires the trustee of a regulated superannuation fund to ensure that fund costs are distributed in a ‘fair and reasonable manner’ as between all members of the superannuation fund and the various kinds of benefits held by each fund member. This is illustrated in the following example:

EXAMPLE

Rico and Joel are brothers and members of an SMSF known as RJ SMSF which is 100% in accumulation phase. They are also the directors of R&J Pty Ltd, which acts solely as the trustee of the RJ SMSF. Rico and Joel are not members of any other superannuation fund.

Based on their working papers, the brother’s anticipate that just before 1 July 2018, Rico’s TSB will be $1,604,000 and Joel’s TSB is $802,000.

However, in the weeks leading up to 30 June 2018, R&J Pty Ltd obtains extensive professional advice for the fund from a reputable financial planner and tax agent.

On 25 June 2018, R&J Pty Ltd receives an invoice in relation to the advice for $12,000 which is payable within 14 days. For completeness, all dealings between the relevant parties were at arm’s length and the amount charged was consistent with commercial rates for such professional advice. Accordingly, the directors of R&J Pty Ltd have a choice to either:

  • pay the invoice either in FY2018 (ie, on or before 30 June 2018); or
  • pay the invoice in FY2019 subject to the payment terms.

The directors of R&J Pty Ltd ultimately elect to pay the invoice before 30 June 2018.

As Rico and Joel are the only two members of the RJ SMSF, the directors of R&J Pty Ltd resolve to charge the cost of the invoice in a ‘fair and reasonable manner’ by apportioning the fee proportionately based on their respective entitlements in the fund. Accordingly, the total amount of the expenses ($12,000) is apportioned as follows: $8,000 is charged against Rico’s benefits and $4,000 is charged against Joel’s benefits.

As a result of this course of action, immediately before 1 July 2018 Rico’s TSB is $1,598,000 (it would have been increased to $1,606,000 if not for the $8,000 expense charged against Rico’s benefits). Similarly, immediately before 1 July 2018, Joel’s TSB is $799,000 (it would have increased to $803,000 if not for the $4,000 expense charged against Joel’s benefits).

Conclusion

As can be seen from the above, paying arm’s length and appropriate fund expenses can be used as a strategy to reduce an individual’s TSB, subject to the super and tax rules. This strategy can be used in isolation or in various permutations with other strategies.

Before implementing any strategies, consideration must be given to determine whether the implementation of a certain strategy to a particular set of background facts might trigger the anti-avoidance provisions. We have not covered any anti-avoidance provisions such as pt IVA of the Income Tax Assessment Act 1936 (Cth) in this article. However, if the Australian Taxation Office (‘ATO’) considers that a tax benefit arose from a scheme that was tax driven, there is the prospect of the ATO raising a pt IVA assessment. Where in doubt, expert advice should be obtained.

In Part 3 of our series, we highlight two other strategies that can be used to reduce an individual’s TSB.

The law in relation to TSB is a complex area of law and where in doubt, expert advice should be obtained. Naturally, for advisers, the Australian Financial Services Licence under the Corporations Act 2001 (Cth) and tax advice obligations under the Tax Agent Services Act 2009 (Cth) need to be appropriately managed to ensure advice is legally provided.

DBA Lawyers offers a range of consulting services in relation to TSB issues. DBA Lawyers also offers a wide range of document services.

*        *        *

Note: DBA Lawyers hold SMSF CPD training at venues all around. For more details or to register, visit www.dbanetwork.com.au or call 03 9092 9400.

For more information regarding how DBA Lawyers can assist in your SMSF practice, visit

www.dbalawyers.com.au.

25 June 2018

Why many retirees fear for the future

The Australian

June 25 2018

Robert Gottliebsen

For the last four weeks I have been holidaying in Scotland and Norway, where I encountered a lot of Australians who self fund their retirement.

Once the conversation moved from the latest scenic encounter, I discovered a combination of anger, frustration and a fear of the future—a deep emotion that I have never previously encountered on a widespread basis.

Accordingly, those businesses that rely on the spending of self-funded retirees need to understand that the game has changed.

But first, a thank you to those who congratulated me for receiving the Order of Australia in the Queen’s Birthday honours list. I was humbled.

In recent years spending by self-funded retirees has been strong and been a big contributor to tourism and the support of charities.

A great many retirees are now cutting back and some cruise operators in the up- market areas are reporting a 25 to 30 per cent fall in advance bookings and unheard-of cancellation rates, despite the consequent deposit losses.

Retailers in that sector will also notice the difference. Centrelink pensioners and those enjoying bonanza public service pensions are not affected. It’s those who sacrificed their living standards in past years to put money away for retirement that the politicians are targeting.

Among the self-funded retirees the most deep-seated anger is directed towards the Coalition, which retrospectively savaged retirement planning and broke all the previously established rules of government.

It’s not what the self-funded retirement community expected from the conservative forces in the government.

Having said that, they have adapted, which is why they are travelling overseas. Some are running down their retirement savings to greatly increase their dependence on the government pension. They hate doing it but we have a government that thinks little about the long-term implications of what it did.

Had the ALP said they would make no further changes, the retirement community might have supported them in droves.

Instead the ALP decided that if it was good enough for the Coalition to kick the sector it should join the party, so launched an all-out assault on self-managed fund funds in pension mode with assets roughly between around $400,000 and $800,000, reserving a special kick for retiring small entrepreneurs.

Shadow treasurer Chris Bowen believes there are big sums to be harvested but I don’t think he understands the retirement community and in my view he is simply wrong.

Indeed an angry retirement community is already carefully planning strategies to make sure the ALP does not harvest their franking entitlements.

People I spoke to will bring their children into their fund to take advantage of a planned loophole that has been set up to enable large superannuation funds, including industry funds, to use the taxable income of those fund members NOT in pension mode to offset the franking credits of those in pension mode. If an ALP government tries to block children being incorporated into self-managed funds it will endanger the planned industry fund strategies. Others hope to delegate their Australian equity management to the large funds. It might work.

Yet others will change their investment strategies.

These people are in their 60s and 70s and they planned their retirement decades ago in line with the rules of the day. The self-funded retirees will adapt but it’s much harder for the retiring entrepreneurs who used their accumulated tax-paid profits to fund their business.

When they sell the business, or just close it down, they aimed to pay out the accumulated profits in fully-franked dividends. As they have no other income, Bill Shorten and Bowen have them in a headlock.

And this could be a trigger for a much wider attack on pensioners.

And assuming the ALP wins the next election (and that is not a prediction but merely an assumption), in my view it will soon discover its sums are wrong. To cover the shortfall it may to attack the government pension community.

Perhaps illogically, in the eyes of the retirement community it’s not just the politicians who have them in the gun.

The Reserve Bank has lowered official interest rates to help young people, leaving the elderly relying on bank deposits for income to suffer. That pushed many into bank shares and their high dividends. Now we have a royal commission into the banks. The consequent fall in bank shares (plus Telstra) is another blow.

At the same time medical costs are rising faster than inflation.

It’s true the dwellings of self-funded retirees have increased in value, particularly in Sydney and Melbourne, but there is a shortage of apartments of a reasonable size so many are staying put rather than downsizing to release cash.

Meanwhile those rely on their parents for the education of grandchildren and other handouts are now feeling nervous because of the fear building up among their parents.

One day a group of politicians will decide that there are family votes to be gained. Although the Coalition is tarnished, a solemn promise of no more blows might help, given the ALP is thirsting for more retiree blood. Minor parties are winning votes in Europe. The same thing may happen here.

Super panel must be ‘above reproach’

The Australian

June 22 2018

Michael Roddan

Reserve Bank governor Philip Lowe would take charge of appointing independent experts to a panel that chooses the top performing superannuation funds in Australia to manage the savings of unengaged workers, in new proposals outlined by the Productivity Commission.

Karen Chester, deputy chairman of the Productivity Commission, used hearings yesterday to float the idea of a group of regulators who were “beyond reproach” to select the proposed expert panel that would nominate the 10 “best-in-show” super funds that savers were to choose from.

Ms Chester said this would be chaired by the RBA governor and assisted by the chairman of the Australian Competition & Consumer Commission and the Australian Taxation Office commissioner.

“We want the expert panel to be accountable to the government of the day,” Ms Chester said. “People who are above reproach (and) who have no fear or favour with the government of the day. The government of the day makes those appointments, but the process is transparent and highly scrutinised.”

The Productivity Commission’s landmark report into the $2.6 trillion super system produced a series of recommendations aimed at lifting performance in the default super market, including the key proposal of a “best-in-show” list of funds that would share in about $1 billion a year in savings of new entrants to the labour force.

For many smaller funds dependent on continued flow of new savers, accessing the best-in-show list could be a life or death ruling. Ms Chester has proposed that the expert panel select the 10 default funds based on criteria such as long-term returns, fees, investment strategy and governance, but several industry members have raised concerns about the politicisation of the appointees to the panel.

Jeremy Cooper, architect of the government’s 2009 review of super, told a hearing on Wednesday that the risks resided in “the expert panel itself” in an industry that is “pretty divided and highly politicised”.

PricewaterhouseCoopers partner Cathy Nance, a super expert who consults to trustees on mergers, said yesterday the RBA-chaired appointee body was a “really good model” and added that the selection criteria for funds must not favour lowest cost or short-term-focused behaviour.

Industry Super Australia public affairs director Matt Linden, who has campaigned on keeping the default selection panel housed in the Fair Work Commission, was concerned the heads of the RBA, the ACCC and the ATO were government appointees. But he didn’t immediately discount the idea.

“We continue to argue the appropriate location for a merit-based quality filter is the fair work commission, albeit with further improvement to ensure comprehensive coverage and improved transparency in decision-making,” Mr Linden said.

The Productivity Commission’s proposed panel, unlike the Bill Shorten-appointed Fair Work Commission default super expert panel that was abolished in 2014, would be at arm’s length from government, outside the FWC and subject to judicial review.

Australian Institute of Superannuation Trustees chief executive Eva Scheerlinck said what was “more important than who makes the decision is the selection criteria” used to choose the top funds.

Zombie super ‘needs watchdog’

The Australian

June 21 2018

Michael Roddan

Regulators have allowed “dead dog zombie” superannuation funds to underperform for more than a decade without enforcement, according to former Australian Securities & Investments Commission counsel Pamela Hanrahan, who has called for a specialist regulator to take charge of the $2.6 trillion nest egg system.

At a hearing for the Productivity Commission’s review of superannuation in Sydney yesterday, Professor Hanrahan said the current disclosure obligations regime that dominated financial regulation was not protecting consumers.

“That framework … may well be coming to the end of its life. It may well have proved to be a failed experiment in some extent,” Professor Hanrahan said.

“The current disclosure requirements — it’s full of information that is not meaningful to members and it’s provided at the wrong time,” she said.

Professor Hanrahan, an expert adviser to the banking royal commission and the former head of the investment managers stakeholders team at ASIC, which dealt with the aftermath of the 2009 Trio collapse, said super members were often confronted with too much choice. There were some 40,000 super investment options in the for-profit choice segment.

“At the point where an individual member is required to make a choice I don’t think they are well supported by mandatory disclosure or the advice laws at the moment,” Professor Hanrahan said.

There was friction between what ASIC was responsible for in the super system and what was the responsibility of the Australian Prudential Regulation Authority.

“(ASIC) is a financial markets regulator but it’s also a consumer regulator. Sometimes within ASIC there is a bit of tension between those two roles,” she said, noting that ASIC often treated superannuation members as investors rather than consumers.

Professor Hanrahan said while the Productivity Commission assumed the “current regulatory architecture” was immovable, she suggested the department’s final response should aim to shake this up. She floated the idea of a “dedicated pensions fund regulator” or “a specialist consumer regulator for the financial sector”.

“I worked on Trio and that was an interesting exercise in (regulatory) agency co- operation. There is a kind of a sense that people are often surprised at how lenient the performance standards in the industry are,” she said.

“A law firm will say it’s a very high threshold for duty of care (obligations), but the conduct has to be pretty egregious before a successful action can be run. Even though there’s a lot of regulator interest in the space, when you drill down and say: if you’ve got a board of trustees that has woefully unperformed for a decade, it couldn’t possibly be in members’ interests to let this dead dog zombie thing keep lurching along.

“There is a place for regulatory agencies to be clear about the level of professionalism required. Enforcement can reinforce that standard for the rest of the community.”

The Productivity Commission’s draft report on superannuation found entrenched overcharging in the for-profit fund sector, underperforming trade union funds that refuse to merge despite it being in their members’ best interests, and an industry happy to preside over a system that acts as an “unlucky lottery” for many savers.

The draft report said APRA and ASIC “need to become member champions — confidently and effectively policing trustee conduct”.

CHOICE urges strong consumer body to counter fund giants

The Australian

June 20 2018

Michael Roddan

The well-heeled superannuation industry has too much sway on public policy and regulatory debate, according to consumer group CHOICE, which will today argue for proper funding for a specialist consumer organisation that will put the interests of savers above those of the funds management sector.

In comments to be delivered at a hearing today for the Productivity Commission’s inquiry into the $2.6 trillion super industry, CHOICE director Erin Turner will argue the need for an independent body that represents the interests of superannuation members.

“While CHOICE does our best to represent consumers in industry, regulatory and legislative debates about superannuation, we currently are only able to devote half the time of one policy adviser to this sector,” Ms Turner will say.

“In comparison, industry groups have large budgets and staff to influence the public policy decision-making. We need an equivalent body to represent the interests of members.

“Unless there is a strong organisation dedicated to representing consumers in technical debates about superannuation, we’ll continue to see industry groups dominate discussion and conflate their interests with the interests of their members.”

The PC’s draft report on superannuation found entrenched overcharging in the for-profit fund sector, a tail of underperforming trade union funds that refuse to merge despite it being in their members’ best interests, and an industry happy to preside over a system that acts as an “unlucky lottery” for many savers.

The recommendations to ensure only the best performing funds manage the savings of the least engaged members have sparked a backlash from super lobby groups such as the Association of Superannuation Funds of Australia, Industry Super Australia, the Australian Institute of Superannuation Trustees and the Financial Services Council. These industry lobby groups are believed to have about 100 staff, with more than 20 devoted to superannuation policy and research.

Karen Chester, deputy chair of the Productivity Commission, found funds were often acting in their own interests rather than those of their members.

ISA last year ran a budget of $22 million paid for by its 16 member funds. The FSC has a budget of about $9m a year. AIST charges its member funds just under

$10m for representation, while ASFA has annual revenue of about $13m.

The idea of a consumer-focused superannuation group was first floated as a contribution to the Cooper Review of the retirement savings system.

“Australia needs a consumer group that can focus on the highly technical area of superannuation and represent their interest,” Ms Turner will say. “This is common practice in other consumer sectors including health, energy and telecommunications.”

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