SuperRatings & Lonsec
Day of Confrontation 2017
Grand Hyatt, Melbourne

12 October 2017

Award superannuation approved by the Australian Conciliation and Arbitration Commission is now 30 years old. Superannuation implemented by the Commonwealth under its tax power – the Superannuation Guarantee Charge – is now 25 years old. We have quite a deal of experience to judge how the system is performing. It is no longer in its infancy. It is maturing, if not a fully mature system.

The origin of Award superannuation was the ALP – ACTU Accord Mark II of September 1985. It was agreed there that a 3% wage rise should be paid, not to employees, but into superannuation on their behalf. The then Government also pledged that:
“before the expiration of the current parliament the Government will legislate to: – establish a national safety net superannuation scheme to which employers will be required to contribute where they have failed to provide cover for their employees under an appropriate scheme”

Taken together the proposal was:-
(a) employer/employee schemes would be certified by the Arbitration Commission where there was agreement;
(b) outside that there would be a national safety net superannuation scheme;
(c) a 3% contribution would be a safety net, not to replace the Age Pension but to supplement it.

Neither the contribution into the Fund nor the earnings of the Fund were to be taxable. That was introduced later, in 1988, when the Government needed revenue, so it decided to bring forward taxation receipts otherwise not payable until there were end benefits. With few lonely exceptions, Governments have been hiking superannuation taxes ever since.

There had been various proposals throughout the 20th Century to set up a funded retirement scheme in Australia The Chifley Government introduced the National Welfare Fund Act of 1945 to impose an additional tax levy which, along with a payroll tax paid by employers, would pay for such benefits. The money was separately accounted for but nonetheless treated the same as consolidated revenue. It was formally abolished in 1985. No individual benefits were ever paid from it. When I became Treasurer in 1996, people were still writing to me asking about their entitlements in the National Welfare Fund! There was nothing to look for.

In 1973 a National Superannuation Committee of Inquiry was established and in 1976 it reported and recommended a partially contributory, universal pension system with an earnings – related supplement. This was rejected by the then Fraser Government.

The first leg of Award superannuation, Consent Schemes were endorsed by the Arbitration Commission to come into operation where there was Employer – Union agreement from 1 July 1987.

The second part – a national safety net scheme was never followed through.

What the Government, in fact, did was to introduce the Super Guarantee System which provides that unless an employer pays a superannuation contribution into an approved Superannuation scheme it is liable to pay an equivalent or greater charge to the Tax Office. No sane employer would give money to the Tax Office when they could use it to benefit employees. As a result money was forced into the superannuation system under the Commonwealth taxation power.

When I became Treasurer (1996), the SG was 5% for small business and 6% for big business. When I left office (2007) it was 9% for both. In 2014 it went to 9.5% where it is today. It will start to increase again in 2021 as the legislated table shows:

The SG  system was superimposed (no pun) on the existing landscape – Industry Funds that had been agreed on and certified by the Arbitration Commission, and private – sector company or public offer plans.

After the idea of a national safety net scheme was dropped, there was little interest in a financial structure that would maximize benefits for those compulsorily enrolled in the scheme under threat of taxation penalties. Yet since this is such a valuable stream of income, mandated by the State, there has always been a very vigorous argument between potential recipients about who should receive it.

I will come back to that in a moment.

Australia’s retirement system therefore consists of three parts:
1. The Commonwealth Age Pension currently fixed at 27.7% of Male Total Average Weekly Earnings – maximum rate of $23,254 p.a. for an individual and $35,058 p.a. for a couple . This is income tested and asset tested. It is totally unfunded. It is paid out of tax revenues received in the year it is paid or (if the Budget is in deficit) paid out of a combination of tax revenue and Government borrowings for that year.

2. The Superannuation System. This is a defined contribution scheme. It guarantees no defined benefit. It is fully funded, but subject to investment risk.

3. Income – whether by way of defined benefit or from defined contributions – over and above the SG system. Voluntary contributions are usually the subject of a tax incentive. As we know both sides of politics have recently combined to reduce the tax incentives to discourage larger amounts in private savings.

Average Retirement Benefits

According to APRA’s Annual Superannuation Bulletin, the average balance in the Age Bracket 60 to 64 (coming up to retirement) in an APRA regulated entity with more than four members as at 30 June 2016 was:
Male- $148,257
Female- $123,690

These figures would include those who have made voluntary contributions, that is, those under both the second and third stream above.

Those who have only received the SG payments (with no voluntary contributions) would have considerably less.

If you were born in 1956 you could have been in the SG system since age 30 – for 30 years. This is not a system still in infancy. We are now starting to get people who have spent nearly their whole working lives in it. On average (male and female) the balance is $137, 144.

That balance is worth less than the value of 6 years of Age Pension. Yet life expectancy for males at age 60 is 26.4 years and for females 29.1 years.

The SG system will not provide anyone with average life expectancy a retirement income for life, not at a comfortable level and not at all.

What the SG system will do, is supplement a person’s Age Pension. And it is particularly harsh in that respect.

The Age Pension is subject to income and assets test. Roughly, for each $100,000 of assets (after the first), a pensioner will lose $2,000 of pension. They will lose 50 cents in pension for each dollar of income or deemed income over the threshold. It is an extraordinary high effective marginal tax rate.

Superannuation can give a person extra up to the threshold in assets and income, but after that every dollar they get back results in 50 cents being clawed out of their pension.

The Commission of Audit, which reported in February 2014, noted that around 80% of Australians of pension age are reliant on the Age Pension. It then looked at what would happen if contributions were lifted to 12%. It found that with a 12% SG over the next 40 years, the same number – roughly 80% would be still be on the pension. The difference is that the SG would reduce many of those now on full pension to a part pension (about 20%).

The SG system does not take people off the pension. It supplements it.  And as it supplements it, it reduces their pension 50% for each dollar (above the threshold). In February, APRA reported there were total superannuation industry assets of $2.1 trillion as at 30 June 2016. “Small funds which include SMSFs, small APRA funds and single member – approved deposit funds accounted for 29.7 per cent of total assets. Retail funds held 26.0 per cent of total assets, industry funds held 22.2 per cent, public sector funds held 17.0 per cent and corporate funds held 2.6 per cent.”

Over the last 10 years the fastest growing sector of the superannuation Industry was the SMSF sector. While total superannuation industry assets increased 132% SMSF assets increased 206%. This is the truly voluntary sector of superannuation. These are the people aiming to, and the people likely to, fund a retirement that will take themselves off the Age Pension entirely and for life.

This works out to be a great saving to the taxpayer.

Of course, this is the sector the Government has targeted with new tax increases, particularly through caps on contributions.

What could be done?

Let us think of how this system of fully funded pension supplement could have been differently structured.

Canada is a country that shares many similarities with us – population 36 million with a similar level of per capita income. Like us it has a three tier retirement income system consisting of :

(a) Old Age Security Pension (lower than ours)income tested and unfunded;

(b) The Canadian Pension Plan (CPP), a defined benefit Plan with compulsory contributions, that is partially funded;

(c) Private savings.

The contributions into CPP are currently 9.9% The employer and the employee pay half (4.95%) each. It is planned to go to 11.9% soon. The CPP makes pension payments to contributors when they reach 65 equal to 25% of the earnings on which contributions were made over 40 years. At present the average is around C$7,839 and the maximum is C$13,370.

Like our SG scheme it is an occupational scheme. Unlike ours (because it is DB) it is not fully funded. In another respect the CPP is very different. It is managed and invested by a Government body, the Canadian Pension Plan Investment Board (CPPIB). CPPIB currently has C$300B in investments. It has economies of scale. It is extremely active in Australia. It would be one of the most respected investors in the world.

Let me say that I believe that, subject to safeguards, people should be able to choose who should manage their superannuation. But the reality in Australia is there is a very large cohort of people that don’t.

Their money goes into so-called “default funds” that get allocated to an Industry Fund under an Industrial Award or union agreement, or to a private sector plan by an Employer.

With default funds we are dealing with the money of people who make no active choice about where they want the their money to go or how it should be invested.

Instead of the Government arbitrating between Industry Funds and private funds, there is a fair argument that this compulsory payment should be allocated to a national safety net administrator – let us call it the Super Guarantee Agency – a not for profit agency, which could then either set up its own CPPIB – like Investment Board – the SGIA – or contract it out – the Future Fund Management Agency could do it. There would be huge economies of scale. It would end the fight between the Industry and the profit sector over who gets the benefit of the default funds. Neither sector has been able to attract the money voluntarily. It exists by reason of Government fiat. The Government has decided it should go into the Super system. It could show some interest in managing it in a cost – efficient way.

Default contributions are now spread between many Funds. They allocate them to equity products, fixed income products etc. Sometimes the different superannuation funds use the same managers each paying the fee to do so. Those fees would be reduced if the money were pooled together, if there were one default fund making larger allocations, if market power were used to reduce costs.

It is the other side of the investment equation that particularly interests me. One side is how it comes in, the other side is how it is invested out. You all know that the biggest variable in the benefit that a retiree will receive from Super is the investment return. A bigger pool with economies of scale and access to the best Managers would likely drive down costs and drive up returns. It would be in the interest of all, except of course the mangers, and those interested in using administration fees for other purposes.

CPPIB is an example of how a long term Sovereign Fund investing defined contributions can get global reach, and valuable diversification in asset class and geography.

It also adds to the National skill base that Canada has: – a Sovereign Institution of sophisticated investors operating in global markets. The feedback and expertise developed is very valuable to national decision-makers.

The Concentration in Australian Equity Markets

Now I know that Super Ratings is releasing or has just released its ratings on performance of various funds.

The year ended 30 June 2017 was a good year for superannuation returns. I congratulate those of you who have done well.

For Balanced Funds (growth assets ratio between 60% and 76%), the top quartile return was 11.15% and the bottom quartile was 8.28%. It would be wrong to conclude this means there is a 3% return for skill. Inside this category – Balanced Funds – there is a large variation for growth assets – 15%. We would expect allocation further up the risk curve to do better – and in fact that was the case.

What made returns good this last year was the bounce on global equity markets. You know and I know that the most important factor in return is the overall market movement – Beta.

And what worries me is that the Australian Market is overwhelmingly influenced by Bank Stocks. Bank Stocks make up 25% of the ASX 200. They are either the four largest companies on the Australian Stock Exchange or 4 out of the top 5 – depending on the price of BHP.

There would not be another Western Country where the Stock Exchange is so dominated by financials and in particular by the main banks – the quadropoly as I have previously described them.

We therefore have a situation where superannuation returns are unduly influenced by the returns of the big four Australian Banks. I do not think it is healthy to have retirement incomes so significantly concentrated in this way.

I have no doubt it is an enormous advantage for the Banks. It means that every Australian in a super scheme that holds growth assets (and every working Australian is in a super scheme by virtue of Government legislation, and every person short of nearing retirement will be in growth assets), is invested in Banks.

Banks never have to fear a flight of Australian investors.

By reason of their size and by reason of compulsory pool of savings, Australian superannuation funds with their compulsory rivers of gold have to hold them.

The four big banks are privileged. They are immune from takeover. They cannot merge. They have an ever ready supply of superannuation money flowing in to their stocks. You can see why an air of impregnability and complacency has seeped into the management in Australian banks. Market discipline is negligible. And the returns on equity are hardly matched anywhere else in the world.

Again judging from the experience of CPPIB, the ability to accumulate and diversify with economies of scale might be good for superannuation members and it might also be good for the banking system – not so much in price – but in introducing a little more competition and market discipline.

The big mistake in developing our pension supplement (the occupational contributory superannuation system), is that all the focus was on getting money into it, with not enough thought about the optimal way of managing it. I do not say it has caused it, but it has contributed to concentration of financials in the Australian Stock Market.

The interaction of the tax and welfare system (particularly very high withdrawal rates) means compared to reliance on the Age Pension alone, the system does not bring anything like the benefits touted. To really calculate the benefit of SG, you need to deduct foregone age pension it will trigger.

The system has created an industry. It has certainly delivered benefits for those working in it. But it does not exist for them. It exists for those who are forfeiting wages month in month out in the expectation that in 10, 20, 30 or 40 years they will get to enjoy the fruits of their labour.

Peter Costello

Former Treasurer of Australia – (1996 – 2007)

The Australian

17 October 2017

Judith Sloan – Contributing Economics Editor

The superannuation funds, the trustees, the fund managers and the workers more generally who are employed in the industry think compulsory superannuation is the bee’s knees. But the reality is that superannuation is a dud product for pretty much every present and past superannuation member and, deep down, the government knows this.

In effect, compulsory superannuation is a tax-gathering mechanism that knocks off many people’s entitlement to the Age Pension, full or part, while forcing them to forgo valuable current consumption — think buying a house, paying school fees, taking a holiday.

It is a form of compulsory saving that is taxed on the way in, taxed while it is earning, and taxed, implicitly or explicitly, on the way out.

We should be clear on one thing: governments should use compulsion as sparingly as possible. Think compulsory vaccination, compulsory schooling, compulsory military service, compulsory helmet-wearing for cyclists. Sometimes these interventions are debatable, and rightly so.

The arguments that were used to justify the introduction of compulsory superannuation were twofold: Australia needed to raise its rate of savings, as well as overcome people’s short-sightedness in order to provide for a comfortable, dignified retirement. The alternative was to compel people to save to achieve this outcome.

The first rationale was quickly discredited and is no longer used as an economic argument. The second line of reasoning has a series of weaknesses, most of which were discussed last week by former treasurer Peter Costello.

Costello, now the chairman of the Future Fund, made the point that the system of compulsory superannuation is reaching maturity but is failing to meet its intended objectives. The present final balances of superannuants are relatively meagre, on average $148,000 for men aged 60 to 64 and $124,000 for women.

He notes that the average balance for men and women is worth “less than the value of six years of the Age Pension”. Nice, but no cigar.

Moreover, 80 per cent of those 65 or older rely on the pension, in full or in part.

And even in the context of a lift in the rate of the superannuation guarantee charge — from the existing 9.5 per cent to 12 per cent, heaven forbid — the rate of reliance on the pension doesn’t change overall, although more retirees will be on part pensions.

But here’s the real kicker. Because of the way the income and earnings tests for the pension work, there is an effective 50 per cent tax rate on higher superannuation balances after a certain point. In other words, for every extra dollar you have in your superannuation account, you lose 50c of income from the pension. This is a shocking deal.

What super amounts to is a compulsion on citizens to knock off their entitlement to the pension while having their contributions and fund earnings taxed in the meantime.

It really is highway robbery — and I haven’t even mentioned the excessive fees and charges by the funds that are part and parcel of the way the system operates.

It gets worse. For citizens whose incomes are high enough potentially for them to become self-funded retirees, this government has decided to increase their tax burden and limit concessional contributions to the point that many will simply give up the quest and shoot for the pension, at least in part. This is seriously dumb.

The package of superannuation taxation measures implemented by Revenue and Financial Services Minister Kelly O’Dwyer is so complex and counter-productive that the likely medium-term outcome is less net revenue (and I’m not even talking here about doing your political base in the eye — which is, of course, seriously stupid).

And don’t you just love this: one law insists that employers must pay 9.5 per cent of a worker’s pay into superannuation and another law insists that the worker must remove any amount above $25,000 a year if the worker’s superannuation balance is high enough.

But the government seems incapable of doing anything about this inconsistency.

Indeed, apart from raising taxes and vastly increasing the regulatory burden on superan­nuation, particularly self-managed superannuation schemes, O’Dwyer has been incapable of effecting any real reform of a system replete with perverse features.

For instance, her effort to achieve a better balance of trustees of superannuation funds, with one-third of directors (including the chair) being independent, has come to nothing. She has been faffing about in relation to what should happen to the default arrangements — these give an egregious leg-up to the union industry super funds. There is a long list of other required changes, including enforcement of the sole purpose test for super funds, but it remains just that — a list.

This is where the importance of Costello’s speech comes in. He is proposing that the Future Fund, or a body similar to it, be used as the destination for default funds, which are the superannuation contributions made on behalf of workers who don’t make an explicit choice.

It is estimated that upwards of 75 per cent of workers who could make a choice don’t. Note, however, that in most enterprise agreements (which cover close to 40 per cent of workers), a single superannuation scheme is generally nominated and it is the one associated with the trade union linked to the workplace. (Kelly, you must outlaw this — put it at the top of your list.)

Let’s be clear, Costello is not proposing the nationalisation of superannuation. Rather, he is saying it would make sense for the default funds to flow to a national investment body — think Canada, Singapore — where the economies of scale and scope can ensure lower fees and charges as well as a global reach of investment. One of the biggest flaws of the investment side of our system is the overweight position of local equities, particularly the big banks.

Sadly, it seems unlikely that our system of compulsory superannuation will be dismantled anytime soon, even though it cheats so many people. In all likelihood it has induced higher levels of household debt as people anticipate being able to use their final superannuation balances to pay down outstanding debts, including mortgages.

The key now is to ensure that the super charge remains where it is (at 9.5 per cent); that we have a better way of directing default funds; and that the raft of other reform measures is acted on — sooner rather than later.

Australian Financial Review

12 October 2017

Satyajit Das

Australians make up barely 0.3 per cent of the globe’s population and yet hold $2.1 trillion in pension savings – the world’s fourth-largest such pool.

Those assets are viewed as a measure of the country’s wealth and economic resilience, and seem to guarantee a high standard of living for Australians well into the future. Other developed nations, aging even faster than Australia and subject to fraying safety nets, have held up the system as a world-class model to fund retirement. In fact, its future looks nowhere near so bright.

Australia’s so-called superannuation scheme is a defined contribution pension plan funded by mandatory employer contributions (currently 9.5 per cent, scheduled to rise gradually to 12 per cent by 2025)

Employees can supplement those savings and are encouraged to do so with tax breaks, pension fund earnings and generous benefits.

The gaudy size of the investment pool, however, masks serious vulnerabilities. First, the focus on assets ignores liabilities, especially Australia’s $1.8 trillion in household debt as well as total non-financial debt of around $3.5 trillion.

It also overlooks Australia’s foreign debt, which has reached over 50 per cent of GDP – the result of the substantial capital imports needed to finance current account deficits that have persisted despite the recent commodity boom, strong terms of trade and record exports.

Second, the savings must stretch further than ever before, covering not just the income needs of retirees but their rapidly increasing healthcare costs.

In the current low-income environment, investment earnings have shrunk to the point where they alone can’t cover expenses. That’s reducing the capital amount left to pass on as a legacy.

Third, the financial assets held in the system (equities, real estate, etc.) have to be converted into cash at current values when they’re redeemed, not at today’s inflated values.

Those values are quite likely to decline, especially as a large cohort of Australians retires around the same time, driving up supply.

Meanwhile, weak public finances mean that government funding for healthcare is likely to drop, forcing retirees to liquidate their investments faster and further suppressing values.

Fourth, the substantial size of these savings and the large annual inflow (more than $100 billion per year) into asset managers has artificially inflated values of domestic financial assets, given the modest size of the Australian capital markets.

As retirees increasingly draw down their savings, withdrawals may be greater than new inflows, reducing demand for these financial assets.

This will be exacerbated by labour market changes, including lower job security and slower wage growth, which will reduce employee contributions into the scheme. Values, which depend on a growing pool of pension savings, will inevitably suffer.

Fifth, the system has accelerated the financialisation of the Australian economy. The large inflows and around 600,000 self-managed superannuation funds feed an industry of financial planners, asset managers, asset consultants, accountants, lawyers and custodians, as well as banks and stockbrokers. The more than $20 billion annually paid in fees and costs is of questionable economic value.

Finally, the system may well fail in its primary objective – that is, to minimise the need for the government to finance retirement. The typical accumulated balance at retirement age is around $200,000 for men and around $110,000 for women.

The averages are artificially increased by a small pool of people with large balances, yet they’re still well below the $600,000 to $700,000 estimated to be necessary for homeowning and debt-free couples to finance their retirements, which may last 20 or more years.

The Australian government will need to cover the shortfall for a large proportion of the population. In fact, it will lose doubly, having already suffered a loss of revenue from the generous tax breaks provided for the schemes (estimated at $30 billion annually and increasing), which have been used, especially by wealthy individuals, as a way to reduce their tax burden.

Future generations will also be affected adversely, having to finance payments to older generations through higher taxes or additional government debt, reduced wealth transfers from parents, and lower benefits than those awarded to their predecessors.

The Australian system illustrates the fallacy of all retirement schemes, whether underwritten by governments, employers or by individuals themselves.

Such arrangements can only work in an environment of high incomes, strong investment returns and limited post-retirement life expectancy.

Alternatively, they are sustainable where a rapidly rising population and workforce finance payments to a smaller group of post-retirement workers.

The real lesson of Australia’s experience may be that the idea of retirement is unrealisable for most workers, who will almost certainly have to work

Governments have implicitly recognised this fact by abandoning mandatory retirement requirements, increasing the minimum retirement age, tightening eligibility criteria for benefits and reducing tax concessions for this form of saving.

If the world’s best pension system can’t succeed, we’re going to have to rethink retirement itself.

Satyajit Das is a former banker turned consultant and author.
Bloomberg

The Australian

14 October 2017

James Gerrard

A new estimate for a comfortable retirement puts the mark at $824,000

How much is enough for a comfortable retirement? The estimates keep climbing higher. The actuarial consultant Accurium Ltd has now lifted its estimate from $702,000 to $824,000, but is this on the mark?

The actuaries argue lower investment returns are here to stay and consequently many SMSF trustees are now further away from achieving their retirement goals than ever before.

So what does a “comfortable” retirement look like?

The Association of Super Funds of Australia says “it enables an older, healthy retiree to be involved in a broad range of leisure and recreational activities and to have a good standard of living through the purchase of such things as household goods, private health insurance, a reasonable car, good clothes, a range of electronic equipment, and domestic and occasionally international holiday travel”: That’s a pretty thorough definition.

Now, in terms of what it costs to be comfortable, they calculate that if you’re single you’ll need an annual income of $43,695 and for a couple, you’ll need $60,063.

If you have $824,000 at age 65, assuming you can get 7 per cent investment return, that’s enough to get a couple through a comfortable 20-year retirement before depleting super to zero. Coincidentally, the Australian government actuary calculates that the average life expectancy for a 65-year-old is approximately 20 years so that’s all fine if you’re planning to die when the government says you should, but if you plan to bat beyond the averages, you may need to some tricks up your sleeve.

A big ask for anyone

For those who aspire to retire in their fifties, Accurium calculates that you’ll be pushing north of $1.2 million in super to allow this. And if you want it all, that is, to retire in your fifties and live off $100,000 a year, you’ll need to put away $2.6m in super. Putting aside the sheer difficulty of saving $2.6m on most people’s wages, the main problem is that the government will only let you contribute $25,000 a year into super via pre-tax contributions. For a single person to contribute $2.6m using pre-tax contributions, it would take 104 years, which doesn’t leave much time to enjoy retirement.

But coming back to the question posed — or at least prompted by the actuaries — is it possible to have a comfortable retirement with less than $824,000?

Sydney financial planner Peter Lambert thinks so and says there are several things that can help prolong the longevity of our retirement funds.

Centrelink kicks in as your super balance falls. Mr Lambert says “if you own your house and have more than $821,500 in assets, don’t expect anything from the government. However, once you start to dip below this amount in assets, you’re likely to pick up a part Age Pension in addition to the pension concession card, which can cut your expenses by thousands with concessions on medicines, utilities and rates”.

Another factor is the significant difference in outcomes made by small differences in investment returns. On a simplistic level, if one were to invest their whole super in National Australia Bank shares, which pay a grossed-up dividend of 9 per cent, the

$824,000 calculated by Accurium would last 30 years instead of 20. In other words, if you can get a better investment return, you don’t need the $824,000. You could drop your retirement savings goal by $150,000 to $674,000 by making an extra 2 per cent a year from your investments.

The Bureau of Statistics show that 82 per cent of couples over the age of 65 own their house outright. This also gives most retirees flexibility and options to save less for retirement. Effective downsizing can free up hundreds of thousands of dollars. Alternatively, renting a room on Airbnb has become popular for many of my retired clients over recent years and can add hundreds of dollars a week in income. Lastly, some people may opt to take out reverse mortgages or equity-release products to maintain their retirement lifestyle without having to sell their house.

Open doors to income

For those willing to open up their doors to strangers, an extension to the Airbnb strategy means that you can end up making a profit while on holiday. My parents-in-law are spending a month overseas and have rented their house out while away. Even though they are staying in five-star hotels and enjoying the best that Southeast Asia has to offer, they’ve been surprised that the short-term rental income they’re getting on their Sydney home is more than covering their airfares, hotels and spending money. In short, they’re thinking about taking more holidays.

There’s also a growing trend in people working for longer. Workforce participation has doubled over the past 15 years for older Australians, with 12.6 per cent working past the age of 65 and most loving what they do, reducing the amount they will need to accumulate for retirement.

If $2.6m seems like an impossible amount to save, let alone $824,000, by the age of 65, then don’t worry. Although modelling and projections have been conducted to show what lump sum is required to enjoy a comfortable retirement, it’s not the be all and end all.

What the numbers don’t show are the many considerations and options that people have to still enjoy that prized comfortable retirement but with lower amounts of money saved up in super.

James Gerrard is the principal and director of the Sydney financial planning firm FinancialAdvisor.com.au

The Australian

11 October 2017

James Kirby

More changes are looming in the superannuation sector

Controversial and laborious event-based reporting rules for Australia’s army of DIY super fund operators may be softened by the tax office in coming weeks.

Under current plans the Australian Taxation Office wants all SMSFs (self-managed super funds) to report much more regularly to Canberra.

At present most SMSFs need only deal with the tax office once a year at  “tax time”.

But the ATO ultimately wants funds reporting “event-based” activity on a monthly  basis.

The new reporting rules are set to begin on a quarterly basis under a two-year phase-in, starting on July 1 next year.

The new reporting regime has the potential to affect a lot more fund operators than this year’s changes in pension tax rules.

The majority of funds will not be affected by the tax rule changes around a $1.6 million individual balance cap introduced on July 1. But almost any fund could be caught in a new web of bureaucracy planned by the ATO.

The SMSF Association, which represents professionals in the sector, is lobbying Canberra to make an exemption in reporting requirements for SMSFs with less than $1m in individual assets.

Such an exemption would make a lot of sense in the current framework which already effectively exempts this group from the extra tax potentially loaded on funds that breach the new balance cap.

Jordan George, head of policy at the SMSF Association says: “We are expecting to hear where the ATO has got to on the issue in the next fortnight.”

ATO Assistant Commission Kasey McFarlane recently told an industry conference the idea of the exemption for funds with less than

$1m was currently under consideration.

The “event — based” reporting requirements centre on major movements of money inside SMSFs such as starting a pension or lump sum activities.

SMSF operators will be expected to report key events to the ATO within 10 days of the formalised reporting period. Until July 2020 this will be 10 days after the end of each quarter.

There are fears within the SMSF sector that the application of new reporting rules, coming so quickly off the back of a complex regime change around tax rules, will reduce the attraction of DIY funds, which have been enjoying strong growth in recent years.

The key changes under the tax rules were a reduction in the amount that could be contributed on both a pre-tax and after-tax basis to superannuation fund and the imposition of the $1.6m balance cap on super funds which will require tax to be paid on earnings on amounts above this level.

By William Fettes (wfettes@dbalawyers.com.au), Senior Associate, Daniel Butler (dbutler@dbalawyers.com.au), Director, DBA Lawyers

The new rules that govern when a transition to retirement income stream (‘TRIS’) enters retirement phase give rise to a number of complex issues in the context of reversionary nominations and death. This article examines the retirement phase rules and reversionary TRISs in detail, based on the law and the latest ATO view.

Broadly, this complexity arises due to the ATO view that the retirement phase rules for TRISs do not recognise a member’s death as a relevant condition of release that confers retirement phase status on a reversionary death benefit TRIS (ie, a TRIS that has reverted to an eligible dependant of a deceased member such as a surviving spouse). Accordingly, to receive a TRIS as a death benefit income stream, the recipient must satisfy the retirement phase rules in their own right. If the recipient does not satisfy these rules at the time of the TRIS member’s death, the TRIS must be commuted to comply with the payment standards.

The requirement to cease a reversionary TRIS if it is not in the retirement phase for the reversionary recipient can trigger a number of undesirable outcomes, including loss of the 12-month deferral in the timing of the transfer balance account credit and valuable tax concessions. Due to these issues, it is critically important that SMSF trustees and advisers come to grips with the latest ATO view on the succession planning and tax implications of the retirement phase rules, particularly where there are fund members receiving pensions that were commenced as TRISs.

For simplicity, we will assume the superannuation deed and rules that govern the TRIS or pension have appropriate flexibility and do not limit any of the strategies discussed below.

Background

The starting point is that from 1 July 2017 TRISs are expressly excluded from being in the retirement phase under s 307-80(3) of the Income Tax Assessment Act 1997 (Cth) (‘ITAA 1997’). Due to this exclusion, the earnings on assets supporting a TRIS are generally not eligible for the exempt current pension income (‘ECPI’) exemption.

However, TRISs can subsequently enter retirement phase if the person to whom the benefit is payable:

• attains age 65; or
• meets the retirement, terminal medical condition or permanent incapacity conditions of release and notifies the fund trustee of that fact.

The critical point to emphasise here is that the above conditions of release are tested in respect of ‘the person to whom the benefit is payable’ (ie, the person from time to time receiving the TRIS).

This effectively means that a TRIS that has entered retirement phase has not done so permanently, and the TRIS retirement phase rules will be applied by the ATO in respect of the recipient from time to time, including any future reversionary recipients. Accordingly, a reverted TRIS can lose its retirement phase status if the recipient of the TRIS (eg, a surviving spouse) has not satisfied a full condition of release and other relevant notification requirements. This is notwithstanding the fact that death itself is a condition of release with a nil cashing restriction.

We now consider the implications of these rules with reference to different scenarios where a TRIS automatically reverts to an eligible dependant based on the latest ATO view.

Deceased’s TRIS was not in retirement phase

If a member with a non-retirement phase TRIS that is automatically reversionary dies, what happens depends on whether the recipient has satisfied a full condition of release and other relevant notification requirements.

Recipient is not in retirement phase

If the recipient of the TRIS has not met the requirements in s 307‑80 of the ITAA 1997:

• The TRIS technically reverts for tax purposes, but payment of the TRIS as a death benefit pension is inconsistent with reg 6.21 of Superannuation Industry (Supervision) Regulations 1994 (Cth) (‘SISR’) which requires death benefit pensions to be superannuation income streams in the retirement phase.
• To comply with the payment standards in reg 6.21, the recipient will need to, as soon as practicable, commute the TRIS and:
  • start a new account-based pension in place of the TRIS;
  • withdraw the death benefit as a lump sum; or
  • pay the death benefit using a combination of the above two options.
• The TRIS will cease for super and tax purposes when it is fully commuted and there will be mixing of tax-free and taxable components if the recipient has an accumulation interest.

Recipient is in retirement phase

If the recipient of the TRIS has met the requirements in s 307‑80 of the ITAA 1997:

• The TRIS reverts to the reversionary beneficiary for tax purposes.
• Payment of the TRIS as a death benefit pension is consistent with reg 6.21 of the SISR which requires death benefit pensions to be superannuation income streams in the retirement phase.
• The fund can claim the ECPI exemption in respect of the assets supporting the death benefit TRIS from the date of the deceased’s death.

Deceased’s TRIS was in the retirement phase

We now analyse what happens if a member with a retirement phase TRIS that is automatically reversionary dies.

Recipient is not in retirement phase

If the recipient of the TRIS has not met the requirements in s 307‑80 of the ITAA 1997:

• The TRIS technically reverts for tax purposes, but payment of the TRIS as a death benefit pension is inconsistent with reg 6.21 of SISR which requires death benefit pensions to be superannuation income streams in the retirement phase.
• To comply with the payment standards in reg 6.21, the recipient will need to, as soon as practicable, commute the TRIS and:
  • start a new account-based pension in place of the TRIS;
  • withdraw the death benefit as a lump sum; or
  • pay the death benefit using a combination of the above two options.
• The TRIS will cease for super and tax purposes when it is fully commuted and there will be mixing of tax-free and taxable components if the recipient has an accumulation interest
• The fund’s ECPI exemption in respect of the assets supporting the TRIS ceases on the death of the deceased.
• The extension of the pension exemption under regs 995-1.01(3)–(4) of the Income Tax Assessment Regulations 1997 (Cth) (‘ITAR’) is unavailable as it only applies where ‘the superannuation income stream did not automatically revert to another person on the death of the deceased’ (see reg 995 1.01(3)(c)).
• The 12-month deferral in the timing of the credit to the recipient’s transfer balance account will not apply as the TRIS was commuted.

Recipient is in retirement phase

If the recipient of the TRIS has met the requirements in s 307‑80 of the ITAA 1997:

• The TRIS reverts to the reversionary beneficiary for tax purposes.
• Payment of the TRIS as a death benefit pension is consistent with reg 6.21 of the SISR which requires death benefit pensions to be superannuation income streams in the retirement phase.
• The fund’s ECPI exemption can continue to be claimed in respect of the assets supporting the death benefit TRIS as the pension did not cease (refer to TR 2013/5).

ECPI exemption

As noted above, a superannuation income stream (ie, the tax term for a ‘pension’) that is a TRIS must be in retirement phase in respect of the recipient for the ECPI exemption to apply at the fund-level.

Where a deceased TRIS member and a reversionary recipient of that TRIS are both in the retirement phase, ECPI can readily continue if the SMSF and pension documentation provides for an automatically reversionary pension consistent with TR 2013/5.

However, a unique problem arises in the context of reversionary TRISs where the deceased TRIS member was in retirement phase but the reversionary recipient of the TRIS is not.

Under the tax regulations that have been in place since FY2013, a fund paying a pension that ceased on a member’s death due to it not being automatically reversionary would ordinarily receive an extension to the ECPI exemption in respect of assets supporting that pension provided that the deceased member’s benefits are cashed ‘as soon as practicable’. However, this concession requires that ‘the superannuation income stream did not automatically revert to another person on the death of the deceased’. Accordingly, no extension of the pension exemption is available for TRISs that have reverted for tax purposes even where the TRIS is subsequently commuted due to the reversionary beneficiary not satisfying the requirements in s 307-80 of the ITAA 1997.

Accordingly, unless the death benefit TRIS is commuted on the day of the deceased’s death and a new account-based pension is commenced on the same day, there will be a period of time where no exempt income is available in respect of the assets that supported the TRIS.

Conclusions

We are aware of a number of professional bodies making submissions to the ATO and Treasury with a view of obtaining a more satisfactory solution and potentially a legislative fix may be needed. Accordingly, advisers and SMSF trustees should watch this space as developments unfold.

Naturally, some of the issues discussed above would not arise if the TRIS was an account-based pension, however, at this stage Treasury and the ATO appear to be unwilling to acknowledge the possibility of a TRIS ever being able to convert to an account-based pension without the TRIS being commuted and commenced as a new pension, notwithstanding the long-standing industry practice in this area.

Accordingly, at this stage, the only sure-fire way to overcome the above issues is for the retirement phase TRIS member to commute their TRIS during their lifetime so that a new account-based pension can be commenced that can be reverted to any eligible dependant. If, for example, a surviving spouse receives a reversionary account-based pension on the death of a member, there is no need for them to satisfy any condition of release because death by itself is a condition of release with a ‘nil’ cashing restriction. Naturally, this involves some upfront administration and costs that need to be weighed up against likelihood hurdles in the future.

If a retirement phase TRIS member does not commute their TRIS and commence an account-based pension instead, and the intended beneficiary of their death benefits is not likely to be in the retirement phase at the time of the member’s death, the TRIS member should strongly consider making the TRIS non-reversionary so that the extension of the ECPI exemption is available on their death.

*        *        *

This article is for general information only and should not be relied upon without first seeking advice from an appropriately qualified professional. The above does not constitute financial product advice. Financial product advice can only be obtained from a licenced financial adviser under the Corporations Act 2000 (Cth).

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

For more information regarding how DBA Lawyers can assist in your SMSF practice, visit www.dbalawyers.com.au.

DBA LAWYERS

5 October 2017

We disclaim all liability howsoever arising from reliance on any information herein unless you are a client of DBA that has specifically requested our advice. No unauthorised copying of any material produced by DBA should be made unless you have our prior written consent.

By Gary Chau (gchau@dbalawyers.com.au), Lawyer, and Bryce Figot (bfigot@dbalawyers.com.au), Special Counsel, DBA Lawyers

Introduction

A salary sacrifice arrangement is still worthwhile post-30 June 2017 since some employees find it both administratively easier and tax effective for their employer to contribute more into superannuation in lieu of their future salary and wages.

Unfortunately, some employees will be let down by a gap in the way our salary sacrifice regime operates, which allows employers to meet their mandated superannuation guarantee (‘SG’) obligation and overall contribute less money to an employee’s superannuation fund. However, a draft law aims to close this gap.

What is a salary sacrifice arrangement?

Broadly, a salary sacrifice arrangement is where an employee, with their employer’s consent, foregoes a certain amount of their future salary and wages and the employer is expected to contribute the sacrificed amount to the employee’s superannuation fund.

These contributions are deductible for the employer and are not included in the assessable income of the employee (subject to the possibility of the employee exceeding their concessional contributions cap). Rather, these contributions are included in the assessable income of the superannuation fund and generally taxed concessionally at a rate of 15%.

The SG regime

The SG regime is established under the Superannuation Guarantee (Administration) Act 1992 (Cth) (‘SGAA’). Broadly, the regime requires employers to make superannuation contributions for their employees equal to at least the minimum level of superannuation support set out in the legislation (which is 9.5% for the 2017-18 financial year).

Technically, the SGAA does not place a positive obligation on an employer to pay superannuation contributions on behalf of an employee. However, where an employer fails to pay the minimum level of superannuation contributions on behalf of an employee, which is measured on a quarterly basis (for the quarters ending on 31 March, 30 June, 30 September and 31 December), the employer will be liable to pay the SG charge on their SG shortfall (s 16 of the SGAA).

The gap in the current salary sacrifice regime

To illustrate the gap under the current regime, consider the following scenario:

Tony works for his employer, BAD BOSS PTY LTD, and receives $100,000 in salary and wages. His ordinary time earnings for the purposes of the SGAA is $25,000 per quarter. Tony would have an entitlement to $2,375 in SG contributions per quarter, which is determined by multiplying $25,000 by 9.5% (the current minimum SG contribution rate).

Tony enters into a salary sacrifice arrangement with BAD BOSS PTY LTD where he sacrifices $2,000 for each quarter from his salary and wages and in return, his employer is meant to contribute the $2,000 to his superannuation fund (on top of the employer’s mandated SG obligation). Tony expects his superannuation contributions to rise to $4,375 per quarter.

Unfortunately, under the current SG regime, BAD BOSS PTY LTD could use the sacrificed amount, $2,000, to satisfy part of the BAD BOSS PTY LTD’s mandated SG obligations and only makes a contribution to Tony’s superannuation fund of $2,375 (which comprise mostly of Tony’s $2,000 salary sacrificed amount). In a perverse turn of events, it is also worth noting that BAD BOSS PTY LTD’s mandated SG obligations would also be lower at $2,185 and calculated in respect of $23,000 instead of $25,000 (ie, $25,000 minus salary sacrifice amount) per quarter.

In this scenario, Tony would only be sacrificing $2,000 from his quarterly salary and wages with no additional contributions being made to his fund beyond BAD BOSS PTY LTD’s mandated SG obligation. For Tony to realise the error, he would need to check with his superannuation fund, which, like most people, he checks only once a year around tax time.

While the above example may seem ludicrous and unconscionable (on the part of the employer), unfortunately it seems that this gap is utilised by some employers. In the Industry Super Australia and CBUS’s report, Overdue: Time for Action on Unpaid Super, released in December 2016, it estimates that up to $1 billion in superannuation guarantee in the 2013-14 financial year was met by employers using employee salary sacrifice contributions. In a contrary view, the Superannuation Guarantee Cross-Agency Working Group’s interim report released in January 2017, which is a report to the government, says that based on the available ATO evidence, this practice is not widespread and the stated $1 billion is likely to be a very large overestimate. Nevertheless, both the industry bodies and working group have recommended that the government close this gap.

A draft law to close the gap

Based on the recommendations from the Superannuation Guarantee Cross-Agency Working Group to the government, on 14 September 2017, the Minister for Revenue and Financial Services, Kelly O’Dwyer, introduced to Parliament the Treasury Law Amendment (Improving Accountability and Member Outcomes in Superannuation Measures No. 2) Bill 2007 (Cth) (‘Bill’) to ‘improve the integrity of the superannuation system by ensuring that an individual’s salary sacrifice contributions cannot be used to reduce an employer’s minimum superannuation guarantee (SG) contribution’.

This Bill proposes to implement the Superannuation Guarantee Cross-Agency Working Group’s recommendations that the Superannuation Guarantee (Administration) Act 1992 (Cth) be amended to:

1. prevent contributions made as part of a salary sacrifice arrangement from satisfying an employer’s SG obligations; and
2. specifically include salary or wages sacrificed to superannuation in the base for calculating an employer’s SG obligations.

The Bill proposes to introduce a number of new provisions to close the gap. In particular, the Bill proposes to add a new interpretation provision, s 15A, titled ‘Interpretation: salary sacrifice arrangements’, which will contain the following:

15A   Interpretation: salary sacrifice arrangements

Salary sacrifice arrangement

(1)      An arrangement under which a contribution is, or is to be, made to a complying superannuation fund or an RSA by an employer for the benefit of an employee is a salary sacrifice arrangement if the employee agreed:

(a)   for the contribution to be made; and

(b)   in return, for either or both of the following amounts to be reduced (including to nil):

(i)  the ordinary time earnings of the employee;

(ii) the salary or wages of the employee.

(2)      If an amount mentioned in subparagraph (1)(b)(i) or (ii) is reduced under a salary sacrifice arrangement, the amount of that reduction is:

(a)   if ordinary time earnings for a quarter are reduced — a sacrificed ordinary time earnings amount of the employee for the quarter in respect of the employer; and

(b)   if salary or wages for a quarter are reduced — a sacrificed salary or wages amount of the employee for the quarter in respect of the employer.

Excluded salary or wages

(3)      In working out the amount of a reduction for the purposes of subsection (2), disregard any amounts that, had they been paid to the employee (instead of being reduced), would have been excluded salary or wages.

(4)      For the purposes of this section, excluded salary or wages are salary or wages that, under section 27 or 28, are not to be taken into account for the purpose of making a calculation under section 19.

In determining an employer’s SG shortfall for an employee for a quarter, a new formula under s 19(1) would be introduced as follows:

In calculating ‘quarterly salary and wages base’ in the above formula, the Bill adds the following definition to s 19(1):

quarterly salary or wages base, for an employer in respect of an employee, for a quarter means the sum of:

(a)   the total salary or wages paid by the employer to the employee for the quarter; and

(b)   any sacrificed salary or wages amounts of the employee for the quarter in respect of the employer.

In calculating an employer’s SG shortfall, an employer must also include any amount salary sacrificed to work out their SG obligation to an employee. This ensures that an employee’s SG obligations are calculated on the employee’s pre-salary sacrifice base and not on the employee’s reduced salary and wages (ie, post-salary sacrifice).

Further, under the proposed changes to s 23(2), an employer’s SG charge, which arises if they have not met their mandated SG obligations (and thus have an SG shortfall), will only be reduced if the employer makes a contribution (other than a sacrificed contribution). A sacrificed contribution means ‘a contribution to a complying superannuation fund or an RSA made under a salary sacrifice arrangement’.

The scenario under the proposed Bill

Revisiting the scenario above with Tony, the following would occur under the proposed Bill:

Tony’s quarterly salary or wages is $25,000. Tony enters the salary sacrifices arrangement with BAD BOSS PTY LTD and sacrifices $2,000.

For Tony’s employer, BAD BOSS PTY LTD, the proposed s 19(1) formula provides that in working out BAD BOSS PTY LTD’s SG shortfall it is now calculated in respect of Tony’s quarterly salary or wages base. Tony’s quarterly salary or wages base is worked out by totalling Tony’s total salary or wages for the quarter, $23,000, and any sacrificed salary or wages amounts of the employee for the quarter, $2,000, which adds up to $25,000. Tony would have an entitlement to $2,375 in SG contributions per quarter. Hence, if BAD BOSS PTY LTD makes less than $2,375 in contributions to Tony’s superannuation fund, it would have a SG shortfall.

Thus, if BAD BOSS PTY LTD only contributed $2,375 for a quarter, which comprises mostly of the $2,000 that was salary sacrificed, it would have a SG shortfall for that quarter.

The new provisions make clear that salary sacrifice amounts cannot be used to reduce an employer’s mandated SG obligations.

Moving forward

The Bill notes that the proposed changes will apply on or after 1 July 2018.

*        *        *

This article is for general information only and should not be relied upon without first seeking advice from an appropriately qualified professional. The above does not constitute financial product advice. Financial product advice can only be obtained from a licenced financial adviser under the Corporations Act 2001 (Cth).

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.

DBA LAWYERS

5 October 2017

We disclaim all liability howsoever arising from reliance on any information herein unless you are a client of DBA that has specifically requested our advice. No unauthorised copying of any material produced by DBA should be made unless you have our prior written consent.

The Australian

20 September 2017

Paul Kelly

The Turnbull government has launched the next phase in its campaign to impose a superior model for superannuation governance as it seeks a fusion between better policy and confronting the financial links between industry funds and trade unions.

This will become an epic battle. It is about financial power, superannuation accountability, consumer choice and fixing the defects and inequality in the system yet retaining its remarkable utility. Below the radar, however, it penetrates to the crisis of institutional power plaguing the Liberal Party.

When those 1980s architects Paul Keating, Bill Kelty and Charlie Fitzgibbon spearheaded the design, they created something unique: mandatory contributions to private super funds. It is an Australian invention.

Australia today has a $2.3 trillion super system, a massive financial edifice, essentially divided three ways: self-management, retail and industry funds. The edifice was built on a Labor-union consensus later embraced by the Coalition. There is no other way a law could exist in an era of stagnant wages that compels workers to defer a portion of their wages — now running at 9.5 per cent — for their future retirement income. In retrospect, it seems astonishing.

Revenue and Financial Services Minister Kelly O’Dwyer, responsible for reform bills in recent days, underlines the government’s starting position: “This money is the property of each and every hardworking Australian superannuation fund member, not the government, not the industry, not the bank executives, not the shareholders, not the employers and not the trade unions.”

Yet Labor and the unions, to this day, retain their sense of political ownership of the system they created. Deep in Labor culture is the belief the Liberals distrust the model, a sentiment the ACTU cultivates relentlessly.

Nothing excites Keating’s anger more than the Howard government’s repudiation of Keating’s 1996 election pledge to lift super to 15 per cent. Consider this ambition — the funds would be immensely more powerful today and the hit on wages far greater.

Kelty was philosophical. “You see, our ideas survived Howard,” he told me in April 2008. Keating’s vision was to tie sharemarket power to retirement incomes, locating super at the heart of globalised capital markets. It was a variation of his enduring strategy now lost to Labor — harness the gains of capitalism for social democratic ends.

The first of the new bills is a re-run of one that failed in the previous parliament — based on searching inquiries by Jeremy Cooper (for the former Labor government) and David Murray (for the Coalition) it proposes super boards have one-third plus the chair as independent directors.

Sounds a no-brainer, you might think. But it clashes with the 50-50 employer-union model for industry fund directors. The unions will tenaciously resist this loss of power. The attitude of Nick Xenophon, who was unpersuaded last time, will be crucial. The argument for reform is strong. The unions have Xenophon in their sights for his support of the Australian Building and Construction Commission law, so the Xenophon-union tensions will play decisively.

But the bigger bill empowers the Australian Prudential Regulation Authority to ensure trustees act in the interests of members, to require greater transparency, to intervene and take protective action — in short, to ensure the law is driven by members, not industry interests. These powers will apply across the board to retail, industry and corporate funds.

At present APRA lacks the power to follow the money trail — it does not know exactly what is happening to members’ funds. The government has dark fears on this front given analysis by former Liberal Party acting director Andrew Bragg that over the past decade as much as $50 million has been paid from industry funds to trade unions. The unions reject this figure.

But if O’Dwyer wants to persuade the Senate independents to back this bill, her pitch is obvious — “empower the regulator to follow the money trail”.

In short, let full transparency apply. If there is nothing to hide, there is nothing to fear.

The third bill is about members’ rights — it allows more than one million workers to choose their super fund and not be bound by the industrial system and an enterprise bargain. Will Labor support individual choice?

The unions will see a pattern here — an attempt to liberate the super model from its industrial origins. Their resistance will be immense. But its zenith will come next year when the Productivity Commission produces its final report on the ultimate fusion between super and industrial relations — the so-called “default” arrangement under which awards and agreements specify a default fund for a member’s super if that person does not nominate a fund.

Incredibly, about two-thirds of fund members fall into this category, but they constitute only about a quarter of the financial assets. That means these people are mainly younger and low paid. Many are locked into poorly performing, smaller industry funds.

If you want an example of roaring inequality here it is – in the super system. There are many low-paid workers (some who can’t afford it) compulsorily losing part of their income to super funds that are underperforming with their assets. Who cares about them?

The Productivity Commission report will explore alternatives to the default model. Its days deserve to be numbered. This will be a defining issue for Labor and the unions. Will the government have the courage to fight this issue in the name of true equality?

The larger picture should be put up in lights. It is about the superiority of Labor at devising long-run institutional arrangements that serve its interests in policy and political terms. In some ways superannuation is the ultimate example. Labor today enjoys support from a coalition of forces — unions, non-governmental organisations, sectoral interest groups and a range of cultural players. The Liberals, by contrast, are weak on two critical fronts: cultural and financial power. This means they stare down the gun barrel of an institutional crisis, a plight concealed by John Howard’s long success as PM.

The irony is exquisite: the party of capital is starved of private capital for its political needs. Remember Malcolm Turnbull had to throw his own money into last year’s campaign. What a humiliation! The Liberal Party’s alleged friends — big banks, big business

— are either no longer its friends or have opted for neutrality.

The message for the Liberals from Bragg is frightening. He judges the anti-Liberal forces — think tanks, unions, super funds, Get Up! and anti-business NGOs — spent about $300m last year on a range of campaigns against the Liberal/business cause, as opposed to $120m spent by groups backing it. You can dispute the numbers; the thesis is correct. The Liberals are being outmuscled and outspent. Labor is the party of institutional power (not always an asset) and the Liberals are weak in networks of support to sustain them.

Bragg attacked the super funds as “cashed-up activists”. In his speech to the Liberal Party federal council, he said: “They fight like mad against independent directors and even harder against the suggestion consumers might be able to pick their own super fund. Why? With $53m paid from super funds to trade unions in the past decade, it’s any wonder.”

Government sources say payments from industry funds to trade unions are about $8m annually and that much of this analysis comes from Australian Electoral Commission data. But what is the true figure and how much is legitimate? We don’t know.

Independent industry figures vigorously discount the quantum. The policy and political stakes in superannuation are intensifying. The showdown will be driven by policy reform and Liberal alarm at the weight of institutional force against it.

The Australian

16 September 2017

James Kirby

Fresh efforts to undermine and stop the spread of DIY superannuation funds are reaching a crescendo: emboldened by the tax crackdown on the system this year, industry lobbyists are now openly attacking the sector with a venom they might have concealed under more supportive governments.

And the alarming part of it all is that while the enemies of SMSFs are substantially crossing all party lines, the supporters of the SMSF brigade are few and far between.

If you want to see the enemies of DIY super in action the Australian Institute of Superannuation Trustees has delivered a manifesto on the issue in the shape of a submission to the Productivity Commission’s superannuation review. It succinctly captures every prejudiced line you will hear super funds at the big end of town (and this includes union-backed industry super funds) take against SMSFs.

You may have thought something called the AIST would be out there earnestly advocating for all trustees of super funds. But it turns out this organisation thinks even now — after a torrent of new legalisation — that SMSFs are incompetent managers of their own money, a baleful influence on the housing market and to top it off they are trying to minimise tax (a grievous sin, apparently.)

The government has got to stamp it all out, says the AIST: “Government policies which facilitate the offer of an unrestricted number of investment options, and which place minimal barriers for the creation of SMSFs, generate material inefficiencies within the superannuation system.”

What a load of twaddle.

There is no need to pick apart this argument because it is such obvious nonsense — the majority of SMSFs have done perfectly well over a long period of time with a relatively narrow asset allocation.

SMSFs are well able to respond to market changes — recent work from Credit Suisse has noted their shift into the market in search of dividend yields as cash rates have dwindled (see graph).

They do not create “inefficiencies in the system” unless the AIST means lost opportunity for big fund trustees to collect more business, and as for “minimal barriers” to the creation of SMSFs, this organisation must have missed the new regulations coming down the line from the ATO in relation to super funds.

Perhaps the most virulent lobbying against SMSFs comes on the property front. Arguments against SMSFs being allowed to borrow for property have been well canvassed — most powerfully by David Murray’s Financial Services Inquiry.

Yet the government reviewed this issue and left it alone. Beyond that it goes without saying that if SMSFs can buy geared share funds, long-short funds and all manner of hedge funds, then why on earth can they not borrow to buy the house around the corner? This is a transaction they will understand a lot easier than the mechanics of  a hedge fund.

What is most fascinating about the AIST submission is the absence of even a pretension of fair treatment — there is so little attempt to look at the bigger picture it is alarming.

We know big funds act against SMSFs at every turn. I came across this first-hand over a decade serving on the advisory board of a medium-sized super fund when the boardroom conversation regularly turned to the need to stop members leaving to start up their own DIY funds.

But now we have an SMSF sector which is amassing real power — John Maloney, the chief executive of the SMSF Association (which represents professionals serving DIY members as opposed to the members themselves), recently told a tax conference the population of DIY fund members will move towards two million in the decade ahead. But you have to wonder if this healthy flourishing of a self-reliant super fund sector will actually now come to pass — the introduction of this year’s substantial clampdown to DIY super rules may just be the thin end of the wedge.

Over the first few months of the new super tax regime we are simply digesting the changes but among professionals a realisation is dawning that the administration of these changes is going to seriously change the nature of every SMSF. Specifically the gradual introduction of new “SMSF event-based reporting” around the policing of new $1.6 million balance caps may be a sign of things to come.

No doubt as the years go by the ATO will continue to get more and more new ideas about the requirements from SMSFs and they will have organisations such as the AIST to back them up every step of the way.

The Australian

16 September 2017

James Gerrard

Following the recent introduction of the $1.6 million cap on tax-free super account balances in retirement, the Australian Taxation Office has suggested a new “event-based” reporting regime will be necessary to keep self-managed super fund trustees accountable as of July 1, 2018.

The new reporting framework will provide the ATO with information that it needs to enforce its new transfer balance cap — that is, the maximum amount of money you can move into a tax-free superannuation pension account. The changes will require an increased level of vigilance for many trustees: most trustees now need only pay attention to SMSF reporting once a year when they do their tax returns; unfortunately, this is going to change.

Under the new system, the way pension accounts are managed could potentially change. Trustees will be obliged to report a range of retirement phase income stream events to the ATO including:

• When any member of the fund starts drawing down an income from the fund;
• When any member of the fund makes a lump sum withdrawal;
• Any time a member moves their super between pension and accumulation mode.

Time frames to meet the reporting requirement could be tight. Although the ATO is yet to finalise the rules, it has already indicated that trustees could have as few as 10 days after the end of the month in which the reportable event occurred to report to the ATO.

Ricardo Accounting SMSF specialist Timothy Ricardo believes the changes will raise compliance costs for SMSFs. “The new event- based reporting framework will add another layer of expenses to the continuing costs already associated with running an SMSF,” he said.

Ricardo also expressed concern that the changes could push SMSFs out of reach of many everyday investors.

“SMSFs are a fantastic investment vehicle but these changes are likely to drive up operating costs, making the goal to set up an SMSF unattainable for some. The main beneficiary of the changes will be SMSF software providers because trustees will become more reliant on them moving forward to automate the process of reporting events.”

The requirement to report the movement of money from pension to accumulation mode could also be a nightmare for older trustees. Some super fund members move their super balance between pension and accumulation phase for strategic reasons and will now need to report each time they do this.

In particular, retirees who undertake a popular Centrelink-related strategy to take one-off lump-sum payments to reduce assessable income under the income test may find the new reporting obligations a nuisance.

Under the proposals from July 1, 2018, taking lump sums out of a super pension will be a reportable event and will require the trustee to notify the ATO.

Star Associates certified practising accountant Luke Star says: “Although the benefits of regular reporting are clear on paper, it is uncertain at this stage whether all this anticipated information being reported to the ATO will be able to be executed in a streamlined manner. There will be a lot of information to analyse and process.

“Depending on the final reporting requirements, up to 600,000 SMSFs in Australia will be sending event-based information to the Australian Taxation Office.”

Although the ATO has indicated that trustees will not have to report every pension payment or every investment gain or loss on an events basis, the pressure will be on trustees to ensure the compliance of their super fund.

Moreover, the introduction of event-based reporting may see a shift of people out of self-managed super funds into retail and industry funds to sidestep the extra reporting headaches, particularly in retirement.

James Gerrard is the principal and director of financial planning firm FinancialAdvisor.com.au