Australian Financial Review

13 December 2016

Sally Patten

In less than three weeks, more than 300,000 retirees will lose all or part of their government pension.

While 220,000 pensioners stand to benefit from the changes by receiving an increase in age pension payments, some 91,000 part-pensioners will be cut off entirely from claiming the age pension. Another 236,000 part-pensioners will have their payments reduced by an average of about $130 a fortnight.

For those on the wrong side of the pension reforms, the next few years could require some adjusting. For one thing, retirees might need to get used to the need to draw on their savings, potentially a big adjustment, given that many Australians are determined to bequeath as much money as they can to their families. Some might need to rein back their spending. Most should use the rule changes as a trigger to review their investment portfolios and check that their money is working as hard as they are – as they sip cappuccinos at the local cafe and look after the grandchildren.

The changes mean that retirees who lose a portion of the part-pension will have to earn at least 7.8 per cent on each extra $1000 of assets over certain thresholds to maintain their capital.

“If you have cash and fixed interest, you have nowhere near that. You need to think about the fact that you might need to be more aggressive ad think about allocating more [of your savings] towards Australian and international shares,” says Don Hamson, managing director at Plato Investment Management.

Under the new regime, from January 1, the upper threshold for a couple who own their own home to receive a part pension will fall to $816,000 from $1.2 million. For a single home owner, the threshold will fall to $542,000 from $794,000.

Taper-rate hit

The changes in the so-called taper rate will further hit part-pensioners. From January 1, 2017 an individual’s pension will be reduced by $3 a fortnight, or $78 a year, for each extra $1000 in assessable assets. Currently the amount of pension falls by $1.50 for each extra $1000 of assets. It is a significant reduction in the income part-pensioners will receive from the public purse.

Moving up the risk spectrum needs to be done with great care, particularly with any money that retirees might need to tap in the short to medium term.

But with that in mind, the good news is that the Australian market is a solid income generator. The S&P/ASX 200 benchmark can be relied upon for producing a 6 per cent yield, including franking credits, says Hamson.

He adds: “If you have a portfolio that is tailored for yield, you should be able to generate between 7 per cent and 8 per cent.”

Sam Morris, a senior investment analyst at research firm Lonsec, concurs. “You should be able to get about 2 percentage points above the market yield,” he tells Smart Investor.

For investors who like to do it themselves, looking at the composition of share income funds can be a useful starting place to study how best to construct a high-yield portfolio – bearing in mind that professional fund managers will use trading strategies to bolster returns.

The top 10 holdings in the Plato Shares Income Fund are: Westpac Banking Corp (10.6 per cent of the fund), National Australia Bank (8.7 per cent), Commonwealth Bank of Australia (6 per cent), BHP Billiton (5.5 per cent), Macquarie Group (4 per cent), Telstra (4 per cent), ANZ Banking Group (3.9 per cent), Woolworths (3.7 per cent), Scentre Group (2.7 per cent) and Wesfarmers (2.6 of the portfolio).

Morris and Hamson both warn that one of the dangers of creating a yield portfolio is the risk that it will be overly concentrated in a limited number of shares. Hamson holds 90 stocks in his fund, but says 20 are sufficient for most investors to achieve diversification.

Exchange-traded funds are another convenient way to achieve a high-income portfolio, but again it is essential for investors to look at the underlying shares, the sector concentration as well as capitalisation or size biases. The use of franking credits from dividends can also give a useful boost to returns. The VanEck Vectors Morningstar Wide Moat ETF (MOAT) and the ANZ ETFS S&P/ASX 300 High Yield Plus ETF are two listed vehicles that are recommended by financial advisers.

Lonsec divides the high-yield actively managed fund universe into two – those that use a standard long- only investment strategy and those that use derivatives to enhance returns – and has four funds on its recommended list. They are the IML Equity Income Fund, the Antares Dividend Builder, the Legg Mason Martin Currie Equity Income Trust and the Plato Australian Shares Income Fund. Only the IML product, managed by Investors Mutual, falls into the second category, using derivatives to boost returns.

While high-yield shares may have fallen out of favour because of the threat of interest rate rises, they are still generating decent income, Morris says.

“The stocks have come off but you are still getting higher yield than cash,” he says.

Performance patterns

The IML fund comes with an investment fee of 0.993 per cent and turnover is relatively low, according to Lonsec.

“The conservatism of its investment approach has historically given the fund a very defensive performance pattern. Lonsec notes that over the past five years the fund has outperformed the index in 90 per cent of months in which the market fell. Conversely, Lonsec expects the fund to underperform during strong ‘bull’ markets,” Lonsec says.

The Antares vehicle has a wholesale management fee of 0.6 per cent, “one of the lowest in the Lonsec peer group”. Lonsec notes: “The bias to high-yielding, large-cap industrial stocks may result in absolute volatility of returns that is lower than the broader market.”

The Legg Mason fund comes with a wholesale management fee of 0.85 per cent and “explicitly values franking benefits on the assumption that individual investors are 0 per cent tax payers”.

The Plato vehicle has a 0.9 per cent management fee. “The fund has been specifically designed to be tax effective in the hands of a 0 per cent rate tax payer by capturing franking credits and exhibiting high portfolio turnover, about 150 per cent a year,” Lonsec notes.

The Australian

12 December 2016

Tony Negline

The new super changes come into effect in July next year. In explaining them, the government has consistently claimed these changes impact very few people. And if you look across all super accounts, this is correct — if you define the group by the relatively small proportion of the population that makes large after-tax superannuation contributions.

But this is only part of the story. Super fund trustees face myriad costs to implement these changes — administrators need to adjust their systems, accountants and financial advisers need to make sure they have correct information to provide their clients with appropriate advice and guidance and so on.

What’s more, the ATO will now have more work to perform. All this additional red tape costs a lot of money to implement and these costs are shared equally among all super fund members.

The best thing for any investor to do in these circumstances is to understand as best they can the changes coming down the track.

Making personal after-tax super contributions has become much trickier now the new super changes have been legislated.

The complexity applies to anyone who was intending to make large after-tax contributions — officially called non-concessional contributions — between July 1, 2014 and July 1, 2020.

The situation occurs for two reasons:

• The government has put complex transitional rules in place, and

• A new rule has been introduced that further restricts how much money can be put into

Transitional rules

Those aged under 75 have a restriction on how much after-tax money they can put into super. Those aged at least 65 but under 75 need to satisfy a work test before making any contributions. From July 1, 2017 this annual amount is $100,000 each year and before that date the annual threshold is $180,000 per annum.

Those aged less than 65 before the start of a financial year can spread three years of non-concessional contributions unevenly over a three-year period. You start a three-year period by making after-tax contributions of more than that year’s annual threshold. Knowing what point you’re at in a three-year period is very important.

I have tried to explain how the transitional rules work in the table. However, even this table needs some explanation.

Two key questions are: what can be contributed before July 2017? And what will occur as we transition into the new regime?

If your three-year period begins during the 2014-15 financial year, then you can make non-concessional contributions of $540,000 between July 1, 2014 and June 30, 2017.

If you contributed more than $180,000 in the 2016 financial year and in total less than $460,000 during the 2016 and 2017 financial years, then the most you can contribute during the 16, 17 and 18 financial years is $460,000 and nothing can be contributed until July 1, 2018.

However if you contribute more than $380,000 but less than $540,000 in 2016-17 year then you cannot contribute anything until the 2019-20 financial year.

The good news is that if you go above these contribution caps the ATO will give you the ability to take the money out of super with only a small penalty. (In past years excess contributions were taxed at the highest marginal rate.)

Total super balance

From July 1, 2017 anyone wanting to make non-concessional contributions will need to know their total super balance. A number of items are used in determining this amount:

• Total super account balances not being used to pay a pension

• Pensions — the market value of any of your account-based pensions and a special value is used for pensions paid from defined benefit super funds

• Other amounts transferred between funds

• A concession will affect payments you might receive because of court or legal proceedings after suffering a serious

Now here’s the tricky rule — after-tax contributions to super will only be permitted if your total super balance at June 30 in the previous financial year is less than $1.6 million and you can only contribute what will push your super balance up to $1.6m.

So the caps mentioned above are the maximum you can put in subject to your total super balance. Next year, super funds trustees are going to face myriad costs to implement these changes. In addition, the ATO will have even more work to perform. It’s going to cost a lot of money for everyone involved in the system.

The Australian

17 December 2016

Glenda Korporaal

The year may be winding down, but for people approaching retirement and wanting to protect their financial future, there will be some hard decisions to be made over the next few months.

After a year of changes and uncertainty for super policy, the first point is that for most people with middle incomes, super is still the best option to save for their retirement.

The new limit of $1.6 million on the amount that can be transferred into the tax-free retirement “bucket” from July 1 next year will still be high enough for many ordinary people.

In fact, the challenge for many people now, particularly in lower age groups, will be to get to the $1.6m in the first place. Here’s why:

• The lower concessional (pre-tax) super contribution levels, which will come down to $25,000 a year from July 1 (including SG payments) and the tightening up of non-concessional (post-tax) contributions, down to $100,000 a year, will make it increasingly hard for many people to get to this level over time.

• Where they can, people need to take advantage of the situation that will prevail for the next few months, which allows concessional super contributions to be made up to $35,000 a year for people over

• More significant will be the last chance between now and June 30 for people to contribute $180,000 a year, or a potential $540,000 over three years, out of their post-tax

These are still basically good ideas, but for people with super balances above or approaching $1.6m, there are more complex decisions to be made.

Any savings older investors have in a super fund above $1.6m, at the time of retirement, will be taxed at 15 per cent from the first dollar of earnings.

While this sounds lower than the lowest marginal tax rate, which starts at 19 per cent, at the moment the first $18,200 of an individual’s earnings are tax- free.

For people over 65 there is the potential to effectively improve their tax situation with the use of the senior and pension tax offset.

This offset scheme has specific rules and limitations, but for people making the decision on whether to put more into their super above the $1.6m level this year, it is worth getting advice on what their long-term tax position will be on their earnings outside of super.

Though the super changes kick in on July 1 next year, a range of cutbacks to pension access will be introduced much earlier — they commence on January 1.

Those who are still working and have available cash outside super should think about taking advantage of the higher contribution caps this financial year anyway, on the basis that the funds can be taken out later.

Capital conundrum

But the real issue for some people will be where they may have to sell shares and other assets that incur capital gains tax to put into super between now and June 30.

With the new $1.6m “transfer balance cap”, these people will need to work out whether the reality of a capital-gains tax bill for this financial year is worth the amount of tax they may save over the longer term getting their retirement money into an environment where they could be paying up to 15 per cent tax on earnings.

There are many issues individuals will need to be aware of in the transition to the new regime from July 1.

Those with more than $1.6m in super who are already in pension mode should get some advice on how they will be affected as, from July 1, their fund will be (actuarially) split into two buckets.

More accurately, any assets over $1.6m as of July 1 (indexed annually in increments of $100,000) will be moved back into accumulation mode.

The $1.6m is the limit that can be transferred into super retirement mode over a person’s lifetime from July 1.

Once in the retirement “bucket”, the amount can go up or down with the market or as a result of withdrawals.

There are many bells and whistles to the changes, with each person’s situation being different. Colonial First State’s First Tech super reform update points out that there is potential for individuals to have a different transfer balance cap over time because of the indexation arrangements.

For those with super funds above $1.6m which are currently in retirement phase, the government has allowed some transitional capital gains tax relief on the amount over $1.6m which has to be moved from the retirement phase back into the accumulation phase.

Under the changes, the government has allowed super fund trustees a one- off chance to elect to reset the cost base of their assets to their current market value.

So if the super fund has bought shares in XYZ Corporation for $1 each some years ago, which have a market value of $5 as of June 30, the trustee can elect to reset the cost base to $5 when the assets are moved back into the 15 per cent tax accumulation mode on July 1.

The CGT relief only applies to assets held between November 9 and June 30.

People with self-managed super funds in this situation should get advice on how the CGT election can work for them.

In short, for most ordinary people, super is still the best way to save for their retirement and they should think about taking advantages of higher contribution opportunities before June 30.

But people with super balances above $1.6m should get advice on the best contribution and investment strategies going forward.

It’s worth thinking about it now as financial advisers and accountants will be under increasing time pressure to answer questions about the changes as the June 30 approaches.

Australian Financial Review

13 December 2016

Sam Henderson

Resetting an asset’s cost base under new CGT relief rules can mean big tax savings but you’ll need careful documentation, writes Sam Henderson who answers your questions on super.

Q: I am 67, have a self-managed superannuation fund (SMSF) in pension mode and, as I am still working part-time, I am also in accumulation mode. My wife is 65. We both exceed the $1.6 million cap. We have a commercial property in our fund that has a purchase (book) value of $1.23 million and a declared value (through an apprail requested by the auditors) of $1.45 million. I suspect the market value is around $2.1 million. My impression is that getting a current valuation, before June 30, 2017, would mean no capital gains tax (CGT) for our investment. That’s unless it exceeded the valuation when it sold, in which case the fund would only have to pay CGT on the difference. Is this the case, or is the fund still liable for CGT on the difference between the original purchase price and the valuation done before June 30, 2017? John

A: John, in the first instance, my understanding is that you will need to be in pension phase or have up to $1.6 million in pension phase before June 30 to take advantage of the CGT relief provisions (that also need to be effected by June 30, 2017 via valuation on your property). The CGT relief provision may be applied in two different instances in your situation.

First, if your pension assets are set at $1.6 million or less and you can get a valuation on the property to incorporate it in the $1.6 million, then you’ll be fine. It is perfectly plausible for a valuation on a commercial property to be valued conservatively despite a potentially higher market value – usually a valuer will give you a valuation range providing some discretion on your part.

Alternatively, if your assets will exceed the $1.6 million cap as you suspect, then the valuation used will become the new cost base assuming you keep the property for another 12 months. It’s my understanding that the CGT reset value provisions will not apply to assets sold within 12 months of the revision of the cost base. For the proportionate percentage of the property in accumulation phase, it will attract CGT at a rate of 15 per cent less the CGT discount of 33 per cent, equating to 10 per cent CGT using the reset cost base at June 30, 2017. So yes, you will pay CGT only on a proportion of the property value, at a discounted rate and using the new CGT reset value as the cost base. Remember, you only pay CGT if you sell the asset. You will also pay earnings tax on the proportion of the net rent from the property. It’s really not that bad and probably a whole lot better than having the property in your own name!

W: Sam, I have a question relating to a reversionary pension from a defined benefit scheme. My wife and I have an SMSF. She has reached the $1.6 million cap in her pension account. I will be only allowed to keep $88,560 in my SMSF pension account after June 30, 2017 as I also receive a defined benefit pension from State Super of $94,465, which is equivalent to $1.5 million after multiplying up by 16. If I predecease my wife, she is entitled to receive 66 per cent of my defined pension amount or $63,000 a year, which is equivalent to just over $1 million when multiplied by 16. Can she transfer money from her SMSF pension account into her accumulation account to allow for the defined benefit reversionary pension she will receive? Brian

A: Brian, I’m hoping you get the tap on the shoulder from the big man upstairs long after June 30, 2017 and therefore I would imagine your lovely wife would have already had her $1.6 million pension balance cap set. This would exclude any further entrants to the asset or income pool that make up that cap. I’m thinking that the reversionary pension would therefore remain taxable to her when she eventually receives it and assuming you predecease her.

Alternatively, if you wanted to get cute about it, you could tip a large portion of her fund back into accumulation phase before June 30. In theory, she could potentially attain a higher pension cap if it’s in fact indexed between June 30 and your departure from the planet. It’s complicated enough to write such a suggestion, though, let alone implement it in any practical fashion.

The government made some positive amendments to the super legislation when it went through parliament a few weeks ago, allowing reversionary beneficiaries up to 12 months (it was going to be six months) before crediting the new income stream to the $1.6 million balance cap. Advantageously, this allows the beneficiary up to 12 months to get their affairs in order before being penalised.

These questions are answered without the full financial and lifestyle details of readers and must therefore be taken as general advice. We recommend you speak to a qualified financial adviser for complete and comprehensive advice.

Australian Financial Review

16 December 2016

Sally Patten

Some experts predict that after the death of a partner who has more than $1.6 million in super, the surviving spouse might look to pump more money into property either for themselves or for their children in order to avoid paying extra tax.

Some experts predict that after the death of a partner who has more than $1.6 million in super, the surviving spouse might look to pump more money into property either for themselves or for their children in order to avoid paying.

This is because any amount in a partner’s super account in excess of $1.6 million must be taken out of the tax-friendly savings vehicle when they die.

“You will have to find something to put the money in,” said Suzanne Mackenzie, a principal at DMAW Lawyers. “One way of dealing with this is to buy a very expensive principle private place of residence. At least you’ll get a tax break,” Ms Mackenzie said.

The changes to the super inheritance rules, which are part of a super reform package designed to make the retirement savings system more sustainable and equitable, are due to come into force in July next year.

“I think it will definitely encourage people to buy more property. It will encourage people to buy big family homes. It is ridiculous from the point of view of housing availability,” said Bryce Doherty, chief executive of UBS Asset Management in Australia.

Graeme Colley, executive manager of SMSF technical and private wealth at SuperConcepts, said that while some people who have been widowed might upgrade their homes, others might buy a home for their children, or help them to pay off their mortgage. Other experts have pointed out that people who have carefully been planning their estates under the current rules will be forced to re-visit that advice, given the raft of changes to be introduced on July 1.

The full impact of the $1.6 million ceiling on super pension transfers is not well understood.

Under the current pension rules, when a person dies their pension must be cashed out, either as a pension or a lump sum outside outside the super system. When the $1.6 million pension transfer cap is introduced, if the deceased spouse has retirement savings both in a private pension account and an accumulation account, any money in the accumulation account will need to be removed from the super system altogether and managed separately. Earnings will be taxed at the marginal tax rate rather than at 15 per cent in an accumulation account or tax-free in a pension account.

However, Mark Draper, an adviser at GEM Financial Advice, said he doubted the pension changes would lead to a property buying spree.

Australian Financial Review

13 December 2016

John Wasiliev

Putting into practice the new super rules that will apply from next July – especially what happens when you have a pension balance of more than $1.6 million – will require some careful planning.

It’s planning that involves knowing how to split the pension balance between a $1.6 million pension account (where the investment returns are tax free) and an accumulation account (where future investment earnings will be taxed).

Along with the practical aspects of this big change, another significant pension-related modification that needs to be understood is that from July 1, funds with a combination of pension and accumulation accounts and members with more than $1.6 million worth of pensions will no longer be allowed to segregate the returns from selected investments.

Segregation is a tax strategy where returns from particular investments are specifically allocated at the fund level to either pension or accumulation accounts.

An SMSF, for instance, with an investment property or shares that have sizeable capital gains will prefer to own such assets in pension accounts as any returns when they are sold will be exempt from tax.

In most cases a fund will have both pension and accumulation accounts because a member was eligible to start a pension and did so. They have an accumulation account because they are still working and saving super.

Eventually all the super ends up in one or more pensions.

In future, however, this won’t be the case where members have $1.6 million in pensions as they will automatically have a pension and an accumulation account.

With the introduction of the $1.6 million pension limit from July 1 and the increasing number of funds with a combination of pension and accumulation accounts, Meg Heffron of Heffron SMSF Solutions says a reason why segregation will be banned is because of the potential for tax manipulation.

There is concern that members might seek to manipulate their investments by switching them from the taxable accumulation side to the pension side shortly before a sale or large income distribution.

With this in mind, the future rule that will apply where a fund has a $1.6 million pension account and an accumulation account will be to proportion the investment returns according to the percentages of the fund in pension and accumulation.

The investment return allocated to the pension account will be tax-free, while the accumulation proportion will be taxable.

As far as the practical application of these new rules is concerned, a reader writes: “I am currently in pension phase but come July 1, I will exceed the $1.6 million cap and understand that some of my SMSF assets must be put into an accumulation account.”

These assets, he says, are mostly shares and managed funds. But how can he identify which shares or funds to put into accumulation by June 30, he asks, when the value of his SMSF is not determined until a tax return is lodged? Further, the tax position of some managed funds is not received until late September or early October.

On top of all this, his SMSF tax return is not lodged for at least six months or even longer after the financial year and the share value used is determined by closing prices on June 30.

Another question is who is notified which assets are identified as being put back into accumulation by June 30?

According to Peter Crump, a private client adviser with ipac South Australia, the new cap of $1.6 million is essentially a restriction on the amount that can be held in tax-free pensions.

To determine their tax entitlements at the moment, most SMSFs use what is called an unsegregated approach where there is a single pool of investments supporting member account balances within the fund. This could be a fund where there are two members or where a member has both an accumulation and pension account in place.

The other approach, the segregated approach, has different pools of investments in place for different members or for pension and accumulation accounts.

This has enabled different assets to be held in the pension process, and therefore be fully exempt from tax on investment income.

Under the unsegregated approach, only a portion of the overall fund investment income is exempt from tax, depending on a certificate from an actuary who calculates that proportion.

Essentially, the tax-exempt proportion is the percentage of the overall fund that is supporting pension accounts throughout the year.

The new arrangements from July 1 require an unsegregated investment approach to be used at all times where a member of the fund has a balance in excess of $1.6 million.

This is a protective feature, says Crump, to ensure that investment sales cannot be manipulated between the different asset pools.

So in response to the last bit of the question, says Crump, there is no need to specifically tag investments that relate to the pension account balance or the accumulation account balance from July 1.

That’s because the balance of the respective pension and accumulation accounts is an accounting or book entry, and the total of these account balances is always equal to the total fund balance.

A most important issue as far as funds with pension accounts of more than $1.6 million is concerned, says Crump, is ensuring that the June 30, 2017 balance is shaved off at $1.6 million and any surplus moved across to an accumulation account.

Fortunately this can be achieved in a fairly straightforward way through an instruction recorded as a minute before June 30 next year from the member to the fund trustee (a corporate trustee or individual member trustees).

This will request as a simple instruction that a pension account balance be established with no more than $1.6 million and any surplus be transferred to an accumulation account.

At the pre-June 30 stage, there is no need to stipulate how much must move into the accumulation account as this won’t be known for some time for different reasons, including the ones the reader has mentioned.

In an SMSF, says Crump, the administration process is often completed in arrears but what is important is that the trustee has a minute that records the need to adjust any pension balance.

Australian Financial Review

16 December 2016

Scott Morrison has given three speeches over the past couple of months setting out of the government’s economic agenda entitled: “Staying the course”.

Critics are wondering: what course?

Fourteen months after he replaced a widely criticised Joe Hockey as Treasurer, Morrison has disappointed some of the people who should be his strongest supporters, including businesspeople, economists and free-market advocates.

Styling himself as a tough, cut-through, sound bite-wielding pragmatist who would drive pro-growth policies, Morrison has failed to formally propose any politically ambitious policies, unlike several of his Liberal and Labor predecessors.

“He has done very little,” says former Liberal leader John Hewson.

“He needs to do more,” says Robert Carling, a former Treasury official who is a senior fellow at the Centre for Independent Studies, a right-wing think tank.

“He has spent far too much time advocating for higher taxes,” says John Roskam, the chief executive of the Institute of Public Affairs, another right-wing think tank.

Generating wealth

Morrison’s best shot at making Australians wealthier – and heading off a Trump-style populist backlash – is to reduce government interference in the economy and make taxation more efficient, orthodox economists believe.

Even though Hockey was criticised as an amiable but ill-disciplined government salesman – his quip that poor people don’t have cars or actually drive very far killed a modest petrol tax hike.

And he pushed several politically unpopular changes regarded by experts as good public policy. One was even implemented: an end to billions in long-term subsidies for General Motors, Toyota, the Ford Motor Co. and their suppliers.

Supporters of deregulation hoped the removal of Tony Abbott – who many in his own party perceived as sceptical of orthodox economics – would lead the new government to propose bolder policy change. And as the principal economic minister, the weight of expectations fell on Morrison.

Achievements

Morrison’s major political achievement is securing parliamentary support for about $6 billion in spending cuts and tax increases, and an agreement to reduce tax breaks on the superannuation savings of the wealthy.

While those policies are an important component of his medium-term goal of balancing the budget – which would deliver the government huge economic and political legitimacy – they don’t please Coalition supporters seeking smaller government and lower taxes.

“It’s arguable whether he’ll ever recover politically from breaking the Coalition’s promise not to increase taxes on superannuation,” Roskam says.

“Many of Morrison’s inclinations are in the right direction. But unfortunately those inclinations haven’t so far been translated into policy. And he’s increased red tape – not cut it. And he’s done very little to reduce the size of government and bring down the deficit.”

Morrison’s office points to a long list of achievements under his name. They include a tax cut for businesses with revenue of less than $10 million, toughening the rules on foreign investment and taxing big foreign companies more, banning high credit-card charges, making the rules easier for financial-technology businesses, toughening the corporate-competition rules and responding to the financial system inquiry led by David Murray, which led the banks to set aside more capital, reducing profits.

These were done “all within the constraints of the previous and current parliaments,” his office says, a reference to Senate opposition. (Morrison declined to be interviewed for this story.

Bad hand

Morrison has one of the toughest jobs in the country. He inherited a huge budget deficit and a Parliament eager to spend and reluctant to save. The fragmentation of the Senate has made negotiating hard.

“The degree of difficulty for a deepening of much-needed economic reform is higher than it has been for some time,” says James Pearson, chief executive of the Australian Chamber of Commerce and Industry.

“The notion of reform fatigue where you are trying to find budget savings is understandable,” says Hans Kunnen, an economist at St George Bank, a unit of Westpac Banking Corp.

Without the support of his boss, Turnbull, Morrison isn’t going be able to take big change very far. Hockey’s abandoned plan to charge a modest fee for seeing a doctor, which was designed to make people value the service more, was recently cited by Prime Minister Malcolm Turnbull as the kind of political mistake he wants to avoid.

With unemployment low and growth high there doesn’t appear to be much community support for change. Following Donald Trump’s election as US president, the Labor opposition in Australia is hinting it will move to the left on economic policy. That could make convincing voters to support change even harder.

Advocates for a more-efficient economy argue that Morrison needs to use his advocacy skills, honed by a career in politics, to lead the public debate. They argue that the economy is more fragile than most Australians appreciate. Most of the new jobs are part time. Low iron ore and coal prices, stagnant wages and weak profits kept growth in national real income low for several years, until the three months ended June 30 this year.

“If Morrison developed a strong economic reform agenda – which included industrial relations reform – and then advocated for it – he could yet go down in history as one of Australia’s more significant treasurers,” Roskam says.

“Too often we see him making the right noises but the actions don’t match what he has been saying,” says Carling.

Costello, Keating comparison

Any substantial changes to economic policy could be years off. In September Morrison said he would ask the Productivity Commission, the government’s independent think tank, to come up with ideas every five years to make the economy more productive.

Other high-level reviews haven’t achieved much, including a review of the taxation system under Kevin Rudd and a commission of audit of the government under Tony Abbott.

Morrison is pushing for solutions to one of Australia’s thorniest challenges: high property prices. Recently he urged state governments to relax rules that restrict the supply of land in cities, a step he argued would make housing more affordable. Another of his priorities is to help Australian companies develop technology for the finance industry.

Observers compare Morrison’s advocacy unfavourably to Paul Keating and Peter Costello, two predecessors. In speeches and in Parliament, Morrison hasn’t developed a compelling narrative about his plans or compelling one-liners that grab the public’s attention, they say.

“His greatest weakness is he doesn’t deal with the facts and he still tries to spin,” says Hewson, who lost the 1993 election proposing bold tax changes.

“‘Everything is rosy and going swingingly,’ he says. The problem in economic terms is that it doesn’t take too long for the data to embarrass you. And I don’t think the uncertainty has ever been greater than today.”

In his second “Staying the course” speech, on September 16 in Melbourne, Morrison laboriously described the current economic and budget environment and listed the government’s spending plans, including $89 billion to build naval ships and submarines, much of it in marginal seats.

“This is the type of the economy that can coax private capital out of its cave,” he concluded.

Fallen star

Today, is it easy to forget how highly Morrison was regarded as an immigration minister in the Abbott government.

Morrison ruthlessly and efficiently staunched the flow of refugees from Indonesia and elsewhere, delivering one of the Abbott’s few big political successes. He was unafraid to offend media outlets, especially the ABC, although he solicited the support of right-wing commentators and broadcasters.

Before the change in party leader, helped by Morrison switching allegiance to Turnbull, it was accepted among pro-Abbott Liberal MPs that he was Abbott’s most likely successor, according to a source with direct knowledge of events.

Today, if Turnbull resigned Morrison would not appear to be the leading leadership contender.

Right now Morrison is concentrating on next week’s mid-year fiscal and economic review, a budget update.

He still has his supporters, in part because there is no obvious other candidate for treasurer among Liberal MPs.

“When you look around the country I still think Scott’s the best man for the job,” says Graham Morris, a lobbyist and former chief of staff to prime minister John Howard. “He is still a family man with his feet planted on the ground, not some airy-fairy economist.”

Australian Financial Review

18 December 2016

Sally Patten

Lawyers and financial advisers are calling for changes to superannuation law to prevent super bequests being awarded to short-term partners and step- children and to avoid lengthy disputes over inheritances.

Experts say the definition in super law of a dependent to whom a super inheritance can be paid is too broad and is inconsistent with family and estate laws.

Super law is also written in such a way that a parent who remarries may find their super savings will not be inherited by their offspring, but may all go to their adult step-children if they fail to plan meticulously.

“The definition [of dependency] is way too lose,” said Mark Draper, an adviser at GEM Capital. “People are driving a truck through it. It’s a dog’s breakfast at the moment.

Blended families are more common than when The Brady Bunch went to air in the 1970s but not every blended family lives happily ever after and the law needs to catch up

“Other aspects of law are far more prescriptive about the legal requirements to prove a relationship existed.”

Peter Bobbin, managing principle of Argyle Lawyers, said: “There are lots of cases of children missing out on their parent’s super.”

He said the issue was becoming “more problematic” because of the rising incidence of blended families.

In the 12 months to June, 22 per cent of all complaints received by the Superannuation Complaints Tribunal related to the distribution of super inheritances, more than double the next most common complaint.

Super is often the biggest or second biggest component of an individual’s assets, so large sums of money are involved.

Lawyers pointed out that, on a person’s death, super is treated differently from other assets because it does not form part of an estate and so cannot be provided for in a will.

Mr Draper said he had seen a number of cases that wouldn’t pass the pub test. “In one instance, a woman died of cancer. Her husband later passed away but, by then, had been living with another woman for less than 12 months. His girlfriend contends, so far successfully, that she should be granted 50 per cent of the dead husband’s super fund, in preference to paying all the proceeds to the 10-year old daughter of the previously married couple.”

In another instance, the super savings of a 19-year-old gay man were awarded to a partner of three weeks. The payment was appealed and eventually largely overturned, but the partner still received 30 per cent of the super inheritance.

One of the problems with the super law is the requirement that super inheritances must be paid to either a spouse, a child, someone who is financially dependent, or someone with whom there is a relationship of “interdependency.”

Interdependency is described as having a “close personal relationship” and living together, providing financial support and providing “domestic support and personal care”.

Unlike in family law, there is no minimum length of time for a couple to live together before they are regarded as having an interdependent relationship. “After one night living together, you might have a higher entitlement to super than the kids,” Mr Bobbin said.

Under family and estate law, in most states a person must have lived with someone for two years or have a child together to be considered a spouse.

Another problem is that, under usual circumstances, adult children can receive a super inheritance, but not adult step-children, unless (rarely used) provisions are made to pay a super inheritance into the estate.

Take a couple with adult children who split and the husband remarries. He dies and leaves his super to his new wife, who, upon her death, is unable to pass on his super savings to her step-children, in other words, the husband’s adult offspring. This is because, under super law, adult step-children are for the most part not recognised.

Mr Bobbin argued that one possible solution would be to allow super savings to be paid to anyone, rather than have it defined in law.

“You could make it so you can name whoever you like on a binding death nomination,” Mr Bobbin said, referring to the form that directs a super fund trustee to whom a super inheritance should be paid.

“You could expand [super law] or the regulations to make it clear how super can be dealt with in a modern family,” he said.

At the very least, said another lawyer, “we need more harmony between super and laws relating to challenging estates”.

One expert noted that super fund trustees were required to act fairly and reasonably when determining who should receive a super inheritance and that different people would have different views as to what constituted a fair distribution. Trustees could also use their discretion as to who should be paid.

The government said it had no plans to change the law but was open to input to ensure it was up to date.

“There are no current plans to change the law in this area, particularly given the broad discretion trustees currently have in the distribution of superannuation benefits upon death,” a spokesperson for Minister for Financial Services Kelly O’Dwyer said.

“However, the government is open to constructive suggestions around the laws of benefits through superannuation funds to ensure they remain in step with societal norms.”

The Australian

17 December 2016

James Kirby

My biggest fear for 2017 is that more and more people are going to believe “there’s no point in saving for your retirement any more”. It’s a fallacy, of course, but that won’t stop the argument taking off.

And it’s stoked by the terrible mistakes the government and Treasury have made in the details of reforms coming through next year in pensions and superannuation.

In essence, the incentive to save and invest has been removed for too many people; the system has actually been attacked from the inside.

In turn, that means two things:

• From a national perspective, the super system will deteriorate as more pressure rises on public

• From an individual perspective, the prospect of being completely independent financially — surely the healthiest goal — has just got

Along with the growing perception that super is a game that’s finished, there is a parallel notion that running your own super, in a self-managed superannuation fund, is now too much trouble, and it’s not difficult to see why.

There is clear evidence there will be multiple situations where someone who has saved less will do better — in terms of annual income (private and government pension) — under the new system. This is a huge error; in fact, it is inexcusable.

Treasury did not sufficiently model these changes.

Just look at this example we recently published from Tony Negline, a superannuation specialist:

Take a couple who owns their own home. They are both over 65, with no mortgage, $50,000 worth of household assets and substantial superannuation investments. On these superannuation assets, Negline assumed a healthy return on investment of 5 per cent.

Assuming one couple has $500,000 in assets and another has $700,000 in assets, the way the numbers work it is the couple with $500,000 who will do better under the new system.

The $500,000 couple will receive $25,000 from their super investments and a part pension of $20,372 — total annual income $45,372.

The $700,000 couple will receive $35,000 from their superannuation investments and a part pension of $5,132 — total income $40,132.

Let’s just spell that out — the couple with $200,000 less saved in retirement will have an annual income that is $5000 better under the new rules.

It will not take long for word of these examples to spread through the community, not to mention the political constituencies of Australia.

Now, don’t for a moment think this is one example concocted to justify criticism of a reform package that was seen by many as a political win for the Coalition.

There are plenty of examples. On pensions, The Australian columnist Jack the Insider published an entirely separate example with a much reduced estimated rate of return of 3.5 per cent (rather than Negline’s 5 per cent) on superannuation investments. He found a homeowning retiree with $600,000 in assets (excluding their home) who now has no access to a pension payment will earn an estimated $21,000 a year.

In contrast, a homeowning retiree with $300,000 in assets (excluding their family home) and a part pension of $18,904.60 will receive $29,404 annually.

Let’s spell that one out, too: the person with half the investment assets of another — $300,000 against $600,000 — gets $8000 more a year from the saving and retirement system.

The only way forward

In 2017 the worst scenario here is that tens of thousands of older Australians simply splash their money on anything — boats, holidays — to get their assets down to a level that they will do better under the system.

The system in turns breaks under the strain and the government responds by further measures that make the system less attractive in an ever deteriorating cycle.

Unless the Turnbull government goes back to the drawing board and makes serious amendments to the reforms, the flaws in the system will feed criticism and despondency.

There is a real risk now the line “It’s not worth saving for your retirement” moves from the superannuation chat forums to the main street.

What’s an investor to do?

The key is surely to believe in your own ability to build self-dependency whatever the system throws up.

Yes, certain people will have a better annual income from playing the system to perfection, but if you want financial independence you are not going to get it trying to save less or invest less successfully.

Moreover, the kernel of the argument against saving for super is based on the notion that you live off your super earnings — which you can choose to do but you don’t have to.

What’s more, if you want to have super that you control, that’s not just for living but for any expense or opportunity that looms for you or your family, then super is still the best way for a huge amount of people.

If you want your future decided by some Treasury official — who doubtless is on a government defined pension — give up trying.

The Australian

16  December 2016

David Crowe

Malcolm Turnbull’s last big pitch at the election still falls flat almost six months later.

The day before the July 2 poll, he urged voters to back the Coalition in both houses of parliament to ensure “strong majority government” to expand the economy. “Only a stable Coalition majority government can do it,” he declared. Voters weren’t listening.

The fact voters turned away from the Prime Minister is indisputable. Why they did so, and how he might win them back, is an argument that divides the Coalition.

The question is fundamental to the next election and already fuels wild ideas about the scale of the backlash. Conservatives are certain Turnbull must look to the Right to bring back a “lost legion” of Liberal voters. Yet the numbers tell a different story.

One way to measure the size of the challenge is to consider the voters who stayed loyal to the Liberals and Nationals in the lower house but backed someone else in the Senate. How many did this? About 825,000 voters, according to the Australian Electoral Commission’s tallyroom.

This is the best proxy for the core conspiracy theory against Turnbull — that he betrayed the conservative base and led voters to desert the Coalition for Pauline Hanson’s One Nation or the Liberal Democratic Party.

The critics assume a mammoth shift at this year’s election. The facts show an almost bizarre coincidence instead. This “lost legion” has not changed at all across the past three years. Tony Abbott won the 2013 election with the same problem: about 825,000 voters who gave their primary votes to the Coalition in the lower house but went elsewhere in the Senate.

To be precise, Turnbull shrank this group by 241 votes. This is based on a tally of primary votes for all Coalition parties, ranging from the Country Liberals in the Northern Territory to the Coalition parties in the states, in both houses in both years. Three years ago the Coalition gained 5.9 million primary votes in the lower house and 5.1 million in the Senate. This year it gained 5.7 million primary voters in the lower house and 4.8 million in the Senate.

So much for the theory that the fractured Senate came about because Turnbull lost core voters who wanted Abbott instead. If the former prime minister was the solution to this problem, why did the same number of Australians give him the same treatment in the Senate?

To put this in perspective, the high point for the Coalition in recent times came in 2004, when John Howard won a majority in both houses. Only 81,000 voters that year gave the Coalition their primary votes in the lower house but chose someone else in the Senate. The ranks of the disaffected have swollen tenfold since then.

It is not hard to see where these voters went. Former Labor senator John Black wrote in these pages in August that Pauline Hanson’s One Nation this year “mopped up” the votes that went to the Palmer United Party three years ago.

Black found a correlation of 0.74 between PUP and One Nation primary votes in the Senate from 2013 to 2016.

The dispute over superannuation, which saw some Liberals quit the party and some donors close their wallets, is central to this argument. When I wrote last week that claims of a voter backlash over super were exaggerated, one reader argued 1.5 million voters fled the Liberals for the Right at the last election. The AEC tally shows no shift of this size. Everyone will have their own interpretation of the data but they should at least accept the official numbers.

Labor has a similar problem. Bill Shorten continues his permanent election campaign but he saw the same splintering in the Senate. About 270,000 voters gave Labor their primary votes in the lower house in 2013 but chose someone else in the Senate. This rose to 580,000 this year. The Opposition Leader achieved a big lift in Labor’s primary vote but plenty of voters hedged their bets.

The Coalition’s challenge is not hard to locate. The real voter backlash was the discontent in Middle Australia where people can only dream of having $1.6 million in their retirement accounts. Obsessed with their internal squabble over super, the Liberals were slow to react to the Labor scare campaign on Medicare.

The Coalition lost 189,000 primary votes in the lower house from 2013 to 2016. The greatest pain came in outer areas of big cities, such as Sydney’s west, where people spend hours commuting to work and do not have enough jobs to choose from. The government’s fortunes depend on its economic message and its ability to deliver big infrastructure projects.

Turnbull and Scott Morrison have not even tried to legislate the centrepiece of their “clear economic plan”, the company tax cut that must be drastically shrunk to have any chance of passing. They end the year with a sense of drift on their economic agenda right at the time of a quarterly economic contraction. What lies beyond the “jobs and growth” slogan? The government is in dire need of a theme for its May budget.

The Coalition backbench may want to focus on the main game, too. The eagerness to chatter about secondary issues, especially the ones that galvanise the social conservatives, tells voters the government is consumed by ideological squabbles. Shorten exploits this with barely any effort.

Jaded voters have given up on “politics as usual”, with obvious damage to both major parties. The proportion of Australians who said they trusted the government to do the right thing for the country fell from 48 per cent in 2009 to 31 per cent the following year. It has flatlined ever since, according to the Scanlon Foundation’s annual surveys. The verdict is clear on leadership coups, negative politics and internal dissent.

There is a tinge of madness in the idea the government will be saved by pushing Turnbull to the Right. The government’s fate will be decided in the middle of the political spectrum. The allure of the negative message, where a simple complaint is always easier than a complex solution, makes it harder than ever to hold the centre. But there is no hope for a government that heads for the edge.