Category: Newspaper/Blog Articles/Hansard

Limited recourse borrowing arrangements can use one bare trustee for multiple bare trusts

By Gary Chau (, Lawyer, and David Oon (, Senior Associate, DBA Lawyers


A common question we get asked when a client’s self managed superannuation fund (‘SMSF’) is undertaking a limited recourse borrowing arrangements (‘LRBA’) is whether there needs to be a separate bare trustee (usually a company) for each bare trust. The short answer is no. However, it is helpful to also go through the other aspects of LRBAs to give more detailed guidance.

Broadly, SMSF trustees are prohibited from borrowing or maintaining an existing borrowing, unless the borrowing complies with the exception under s 67A of the Superannuation Industry (Supervision) Act 1993 (Cth) (‘SISA’). As a simplification, the key features for LRBAs are as follows:

  • The SMSF trustee borrows to acquire a single acquirable asset.
  • The asset must be held on trust, with the SMSF trustee having a beneficial interest in that asset. This other party is often referred to as either a bare trustee, a holding trustee or a custodian. In this article, this other party will be referred to as the bare trustee. However, technically this is a presumptive name since not all of the trusts for LRBAs are actually bare trusts for tax purposes.
  • The bare trustee is the legal owner of the asset purchased.
  • The SMSF trustee has the right to obtain legal ownership of the asset by making one or more payments after acquiring the beneficial interest.
  • If the SMSF trustee were to default on the loan, the lender’s rights would be limited to the rights relating to the asset.

A crucial feature for an LRBA to comply with the SISA requirements is that the asset must be a ‘single acquirable asset’. Section 67A of the SISA provides that the borrowed money must be used ‘for the acquisition of a single acquirable asset’ and, as noted above, it also provides that ‘the acquirable asset is [to be] held on trust so that the [SMSF’s] trustee acquires a beneficial interest in the acquirable asset’.

This means that when the asset is initially purchased, legal title to that asset must be registered in the name of another entity (ie, the bare trustee).

Since a bare trust must be in respect of a single acquirable asset, let’s now examine what the word single acquirable asset means.

Single acquirable asset

The starting point to this definition is: what is an asset? Asset is defined in s 10 of the SISA to be ‘any form of property and, to avoid doubt, includes money (whether Australian currency or currency of another country)’. ‘Acquirable asset’ is defined in s 67A(2) of the SISA, which provides that the acquirable asset must not be money (whether Australian currency or currency of another country) or an asset that an SMSF trustee is prohibited from acquiring. Accordingly, an SMSF cannot borrow to acquire money, or simply ‘borrow money’ without acquiring a single acquirable asset.

On whether an asset is a ‘single acquirable asset’, the ATO state that it ‘is necessary to consider both the legal form and substance of the asset acquired’. Thus, in the typical case, where an SMSF trustee is acquiring real estate and there is only a single title, this property would be a single acquirable asset for the purposes of s 67A of the SISA.

Where there are multiple real estate titles, the ATO in SMSFR 2012/1 adopt the view that multiple real estate titles can be treated as a single acquirable asset only if there is a physical or legal impediment requiring them to be dealt with together. However, this is to be decided having regard to the circumstances of each case. In determining whether multiple real estate titles can be treated as one single acquirable asset, the ATO say the following in SMSFR 2012/1:

  1. Factors relevant in determining if it is reasonable to conclude that what is being acquired is a single object of property include:
  • the existence of a unifying physical object, such as a fixture attached to the land which is permanent in nature and not easily removed and that is significant in value relative to the value of the asset; or
  • whether under a law of a State or Territory the two assets must be dealt with together.

Unless the above factors in SMSFR 2012/1 conclude that what is being acquired is a single acquirable asset, the general rule is that if an SMSF trustee wants to acquire two assets (ie, they are identified in two titles), then two bare trust arrangements and two loans will generally be needed: one for each asset. Ideally, two separate contracts will also exist: one for each asset.

Why does a bare trust have to only contain one asset?

The bare trust should only contain one asset, namely, the single acquirable asset, to ensure that the bare trust itself does not become an in-house asset for the SMSF. If the bare trust contains any other assets — even a bank account — this may give rise to negative in-house asset rule implications (s 71(8)(c) of the SISA).

One bare trustee for multiple bare trusts

Where an SMSF trustee wishes to borrow to purchase multiple assets, a separate bare trust will be required for the acquisition of each single acquirable asset. However, there is no requirement in the SISA or Superannuation Industry (Supervision) Regulations 1994 (Cth) that different bare trustees (usually companies) need to be used for each LRBA.

Thus, one company could be the bare trustee of multiple bare trusts in respect of the same SMSF.

Further, while there is no requirement that the bare trustee has to be a company (ie, you can in theory have individual trustees act as bare trustee), banks will almost inevitably require that the bare trustee is a company before they agree to lend to an SMSF.

Bare trust should play a minimal role

Ideally, the bare trustee should play as minimal a role in the LRBA as possible. For example, any income derived from the asset (such as rent or dividends) should be received by the SMSF trustee directly. The SMSF trustee should also make the loan repayments to the lender.


To maximise administrative efficiencies, the bare trustee should typically not register for a TFN or an ABN. Further, when establishing a new corporate bare trustee, there should be no public officer appointed or bank account opened.

The bare trustee should ideally do nothing more than hold the legal title to the asset.

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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, visit or call 03 9092 9400.

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


28 August 2017

Taxpayer funds not a bottomless pit for welfare

The Australian

28 August 2017


Australia’s ageing population, the federal deficit, commonwealth net debt approaching $350 billion and a vast welfare bill make retirement incomes and superannuation one of the nation’s most contentious and politically sensitive issues. Sooner or later it touches every voter’s hip pocket — and all political parties are acutely aware of the potential of grey power to swing election results in marginal seats.

On the positive side, 25 years after the introduction of compulsory employer superannuation contributions, the share of retirees on full pensions is falling. Yet 80 per cent of Australians still retire to at least a part Age Pension or benefits, a position the 2015 Intergenerational Report warned would barely change in the next 40 years.

Conscientious savers planning to be independent in retirement have been frustrated by years of tinkering with the system that has undermined certainty. Most recently, the Turnbull government incurred their wrath when it capped contributions for high-income earners and cut the over-50s concessional (before-tax) contributions cap of $35,000 to $25,000 from July 1.

Revenue and Financial Services Minister Kelly O’Dwyer has promised the government would not make any further changes to superannuation taxation. That remains to be seen. But her pledge to focus on governance of the $2.3 trillion pool of superannuation savings must be followed through to improve oversight of members’ funds.

Since 2004, the value of super assets has more than tripled yet the ­average annual fee as a percentage of assets under management has barely fallen. Last year, it was still more than 1 per cent. That’s more than $20bn a year in fees — about the same as the defence budget — and double what is feasible.

Two months ago, readers focused on retirement were disillusioned by the revelation in this newspaper that a homeowning couple with $400,000 in super, when combined with the Age Pension, could be better off than a couple with $800,000 to $1 million in super, whose assets precluded them from receiving a part pension.

As citizens of a rich nation, Australians deserve a generous social welfare safety net, but the unpalatable truth is that the current system, one of the most generous in the world, is unsustainable. Social security spending, accounts for more than a third of the federal budget, 35.3 per cent. Over time, budgetary pressures should force this or future governments to tighten Age Pension eligibility rules, which is why incentives for workers to save as they aspire to comfortable retirements must be the focus of government policy.

Maximising workforce participation, and therefore increasing retirement savings, and reducing dependence on unemployment benefits and the Disability Support Pension, is also vital. That’s one reason the Turnbull government, staring down hostile reactions from Labor and the Australian Medical Association, has made the right decision to launch a drug testing trial among 5000 new recipients of Newstart Allowance and Youth Allowance over two years in western Sydney, in Logan, south of Brisbane, and in Mandurah, south of Perth.

The aim is not to stigmatise, shame or punish drug users but to help them overcome their problems and secure work. As Human Services Minister Alan Tudge says, about a quarter of unemployed people took drugs last year, with ice usage about 2.4 times higher than in the general community. Such problems, as he said, effectively exclude the unemployed from many jobs. Under the trial, those returning positive tests will be put on to cashless welfare, which limits the amount people can withdraw in cash — a system with a proven track record in limiting substance abuse.

After a second positive test, recipients would have to see a doctor, at government expense, and undergo treatment in order to continue receiving benefits. It is beyond contention that such an approach would serve the best interests of the unemployed as well as taxpayers, whose largesse is not a bottomless bit.

Emphasis added by Save Our Super

High taxes, more regulation? Sounds like Turnbull’s Coalition

The Australian

26 August 2017

Judith Sloan

Picture the scene. It was this year’s budget lockup and I was trying to keep my head down. I made the mistake of reading the speech that would be delivered in a few hours. Now these speeches are generally vacuous drivel, but this year’s really set the bar at a new low. Scott Morrison would be speaking as if he were a Labor politician.

“We must choose to guarantee the essential services that Australians rely on. We cannot underestimate just how important these services are to people. We must tackle cost-of-living pressures for Australians and their families. We cannot agree with those who say there is nothing that the government can do.”

My god, I thought; the Treasurer is our father in Canberra and he is here to look after us. His likely defence is that the focus groups made him say this.

If that weren’t bad enough, the next instalment came after the entrance of the Treasurer to our room in the lockup. When confronted by some awkward questions about the case for the major bank levy, he quoted the title of the song: Cry Me a River.

In other words, he simply didn’t care that the new impost was ill-considered and economically damaging. He couldn’t even outline a sensible rationale for seeking to rake in more than $6 billion in four years from the four big banks and the Macquarie Group. That the burden of the tax would be borne by customers, shareholders and workers was but a passing consideration for our caring father. But his flock — again thanks to those focus groups — was telling him they didn’t like the banks. The logic is that if you don’t like them, he will impose a whopping new tax on them.

The only way I could get the Treasurer’s preferred song out of my head was to impose another one. And it went like this: you’ve lost that liberal feeling / bring back that liberal feeling.

To my mind, this aptly sums up what has happened to the Turnbull government. It has abandoned support for liberal ideas; for the centrality of individual responsibility. Malcolm Turnbull and other senior ministers increasingly reject the importance of competition and choice as the means of ensuring consumers get the best deal. Instead, they (erroneously) think more government regulation, aggressive bully­ing of businesses and trammelling on legitimate commercial arrangements are the way forward.

There are many — too many — examples and I will go through some of them. But here’s an important general point: if the Liberal Party wants to turn its back on its principles — and I haven’t even mentioned its general embrace of higher taxes and its botched superannuation initiatives — then voters are likely to turn to the real deal when it comes to the rejection of free market economics and install Labor.

Labor’s embrace of big government, high taxes and more regulation is also a repudiation of the Hawke-Keating legacy. But, let’s face it, Labor can concoct a form of words that goes with its retreat from those halcyon days; think fairness, inequality, helping minority groups and the like.

These slogans play less well in the hands of members of the Coalition government even though some of them, including the Prime Minister, laughably think they can lay claim to that much-distorted adjective, fair.

So let’s go through some of the anti-Liberal policy initiatives the Turnbull government has implemented or is proposing to implement. Of course, the major bank levy is right up there as one of the most preposterous.

That the Treasurer could keep a straight face telling us that he was instructing the Australian Competition & Consumer Commission to ensure that the banks didn’t pass the levy on to their customers was a truly amazing sight. What does he thinks happen to taxes? Does he think that businesses absorb the GST?

And how does Morrison’s dub­ious intervention square with the Treasury’s modelling on the revenue that will be gained from the levy, firmly assuming it will be passed on to customers and therefore not affect the banks’ profits? Otherwise, the revenue from the normal company tax paid by the banks would be reduced, and we couldn’t have that.

It is almost impossible to list the new regulatory interventions affecting the banking sector, most of them simply costly and likely to prove ineffective. There are regulators falling over themselves to impose higher costs on the banks.

Arguably, the cost of all these new, ongoing intrusions — think, in particular, the absurd banking executive accountability regime — will be higher than the alternative of having a royal commission into banking, which for political reasons the Liberal Party has done everything to avoid.

Then we go to the energy space. Here the government makes the mistake of openly expressing its reservations for undertaking a series of extraordinary anti-market interventions but proceeding notwithstanding.

Consider the decision to restrict the export of gas for which there had been previous government approval. Or consider the government’s determination to remove the right of the transmission companies to appeal the decisions of the regulator, overriding the basis of good governance of regulated industries.

And then, willy-nilly, the government agreed to 49 of the 50 recommendations of the Finkel review on energy security, even though many of them are ill-conceived and add up to a new layer of costly regulation on a sector that is already overwhelmed by a labyrinth of complex and inconsistent rules and regulations.

And because we don’t have enough energy agencies — there are dozens if you add in the state-based ones — another will be added: the Energy Security Board.

There is also the truly bizarre decision of the Coalition government to support the entreaties of the Nationals to re-regulate the sugar industry in Queensland, turning its back on the previous difficult and expensive decision to remove the single desk selling arrangement in that industry.

And what about the Treasurer’s decision to refuse to lower the prohibitive tariff on imported second-hand cars even though there will be no local manufacturing in this country from the end of the year?

Evidently, regional car dealers and parts suppliers were able to pressure the government to reject this clearly pro-consumer decision. Note that the importation of relatively new second-hand cars is commonplace in New Zealand and other countries, and causes no problems at all. Instead, the Turnbull government’s motto is: rent-seekers, come on down.

During the week, a senior member of the Turnbull government texted me to ask why I was so angry about the government. I’m not angry; I’m just bitterly disappointed. If the Turnbull government ever had a chance of convincing the electorate that it could govern well, it needed to stick with the principles it inherited from the Howard years. And those principles involved commitment to individual responsibility, competition, choice, low taxation and getting government out of the way as much as possible. On all scores, this government has been a complete flop.

Let’s face it, telling the voters that the government is here to look after us will always end in tears. Disappointment, frustration, enfeeblement — these are the likeliest outcomes.

Emphasis added by Save Our Super

No more super tax changes, Libs vow

The Australian

26 August 2017

Glenda Korporaal

The federal government would not be making any more changes to the tax treatment of superannuation, the federal Minister for Financial Services, Kelly O’Dwyer, said yesterday.

“The Coalition has done the job that we needed to do on the taxation of superannuation,” she said at a speech to the Tax Institute in Sydney. “The job has been finished and legislated.

“We have no further plans.”

The undertaking paves the way for super to become an issue in the next federal election, with O’Dwyer arguing that the government’s opponents will be the ones promising higher taxes on super.

But there is also expected to be some scepticism about the longevity of the promise, given that former Prime Minister Tony Abbott won the 2013 election with a promise of no unexpected negative changes to super — a promise broken by the Turnbull government in the budget of May 2016.

Changes that came into effect this July have cut the annual contributions that can go into super on a concessional basis from $35,000 to $25,000 a year. The amount that can be put into super on a post- tax basis has been cut from $180,000 to $100,000 a year.

The changes also set a cap of $1.6 million on the amount of money that can go into a super account that is tax-free in retirement mode. The changes have also reduced the attraction of transition-to- retirement plans.

While the tougher measures are estimated to raise some $6 billion a year, the package also included a range of concessions worth some $3bn, including making it easier for people with low super balances to add several years’ worth of “catch up” contributions from next year.

The government also removed the “10 per cent rule”, making it easier for people who work part-time or in small businesses to get a tax deduction for their super contributions.

Ms O’Dwyer’s promises of no further tax changes will be welcome by the industry, which has been complaining that constant tinkering has undermined confidence in the system.

She said the federal government “legislated a comprehensive package of structural reforms to the tax treatment of super to improve the sustainability, flexibility and integrity of the system.

“The measures ensure that superannuation tax concessions are well-targeted and balance the need to encourage people to save to become self-reliant with the need to ensure long-term sustainability.”

She said there would be no more changes to taxation of super but other changes to improve governance were planned.

While the government has claimed the super changes only had a negative effect on a small percentage of people, the extent of the changes provoked strong criticism from some people with larger super balances who had been actively putting substantial sums of money into super ahead of their retirement.

Ms O’Dwyer told The Weekend Australian that future governments might look at the five-year intergenerational reports as a platform to examine the sustainability of the super system.

Ms O’Dwyer said the tax undertaking would “give Australians certainty and the industry stability about the Coalition’s superannuation tax policy”. “It stands in stark contrast to the Labor Party and the Greens, who will slug superannuants significantly more in tax as they prepare for their retirement,” she said.

She said the Greens’ “so-called ‘progressive super’ tax plan” would “seek to extract up to $11bn in extra taxes over four years”.

“Labor have admitted that their superannuation policy will cost superannuants an additional $1.4bn,” she said.

Emphasis added by Save Our Super

Government’s superannuation policy – Kelly O’Dwyer “We have no further plans”!

The Australian

28 August 2017

Letters to the Editor

In light of these gloomy forecasts on retirement income, one would have expected Financial Services Minister
Kelly O’Dwyer to jump to the defence of the government’s super “reforms” by sharing future policy direction
and related modelling illustrating fewer demands on the public purse to fund retirement incomes.
But no. Her only response to the disaster that is the government’s superannuation policy was her quote: “The
job has been legislated. We have no further plans.” Super fail, indeed

David Taylor, Newport, NSW

Government to collect the compulsory super payments?

The Australian

28 August 2017

Letters to the Editor

There is no doubt that saving for one’s retirement is a good thing (“A super fail: 80pc retire on benefits”, 26/8).
But if the aim was to make people less dependent on the age pension, this does not seem to have happened.
For many, meagre personal pension benefits have to be supplemented by the age pension. There are also
those who through divestment or careful planning of their assets succeed in getting part of the age pension.
In addition, all super accounts attract exorbitant fees and thereby reduce the nest egg. A better system would
be for the government to collect the compulsory super payments, invest them, as it does for the Future Fund,
and guarantee retirement pension benefits commensurate with the contributions made during one’s working
B. Della-Putta , Thorngate, SA

[Superannuation] money matters top of mind as Peter Costello contemplates 60

The Age Businessday

27 July 2017

CBD – Colin Kruger

He may be just weeks away from his 60th birthday, but our former treasurer and Nine Entertainment chairman, Peter Costello, showed he still knows how to play an audience at the Financial Services Council Leaders Summit in Sydney.

Actor Rob Carlton joked in his introduction for Costello that our former treasurer is not an Australian citizen. Costello replied that he had always thought he was an Australian citizen, but he looked into it this morning and discovered he was in fact the son of Bill Gates, and he was going to send him a bill.

Gates turns 62 in October and may be better with his arithmetic than the Future Fund chairman. And if he isn’t, well, he better beware given Costello managed to blow our once-in-a-lifetime mining boom with very little to show for it.

Digging into his trove of political anecdotes, Costello mentioned that the bureaucrats originally proposed to call our bank regulator, APRA, the Australian Prudential Regulation Insurance Commission or APRIC.

He asked them how you’d pronounce it, and they said “a prick”. Costello said he didn’t think that was a good idea.

“I don’t miss politics,” Costello said. “The bad thing about politics is you have to spend a lot of time in Canberra and I don’t miss Canberra. Since I’ve left politics, I think I’ve been back to Canberra three times.”

That may explain why the television networks are having so much trouble getting rid of the licence fees. Honestly, what is Nine paying him $425,000 a year for?

And Costello could not resist a swipe at Malcolm Turnbull’s government and its miserly attitude to superannuation reforms, which kicked in from July 1 this year.

“I don’t see what’s wrong with giving people a tax break to put money into super,” he said. “The government gets it back eventually when you take them off the pension, but that theory seems to have fallen out of favour.”

Is the thought of retirement a little closer to home now that someone is about to turn 60?

(Emphasis added by Save Our Super)

Tax experts blast super changes

The Australian

8 August 2017

Pia Akerman | Reporter | Melbourne | @pia_akerman


Psychologist Maureen Burke is one of thousands of Australians upset by changes to the superannuation system. Picture: Lyndon Mechielsen

Tax lawyers, accountants and fin­ancial planners have attacked the government’s changes to superannuation regulations, declaring it a “shemozzle” with widespread confusion about details affecting thousands of people.

Under changes that came into effect on July 1, a $1.6 million transfer cap has been imposed on the total amount of superannuation that can be put into a tax-free retirement phase account.

Any excess funds now need to be put into an accumulation phase fund — where earnings are taxed at 15 per cent — or withdrawn from the super system.

Despite being a key part of the government’s superannuation reforms, details about the balance transfer cap’s application were still being finalised in June, with industry experts voicing frustration about the uncertainty.

The Tax Institute, representing tax professionals, has warned that further sticking points are likely to emerge as a result of the rush to implement the reforms, which were first announced in last year’s federal budget. “Since May 2016, this has been a real debacle,” institute superannuation committee chairman Daniel Butler said.

“The industry is just up in arms about it. It’s proving to be an absolute disaster in practice.”

The government was forced to backflip on its initial plan for a $500,000 “lifetime cap” on non-concessional contributions following uproar from backbench MPs, parts of the super industry and many conservative voters, instead reducing existing annual non-concessional contributions cap from $180,000 a year to $100,000 a year.

Industry bodies told The Australian that although Treasury and the Australian Taxation Office had worked diligently to confer about how the changes would apply, too much reform was implemented too fast.

While the balance transfer cap is the main issue, there is also some confusion around eligibility for one-off capital gains tax relief available for self-managed super funds to partially offset capital gains arising from complying with the $1.6m cap.

Financial Planning Association policy head Ben Marshan described the reforms as “a bit of a shemozzle” with elements of the transfer balance cap still being legislated in the month before it was due to take effect.

“Consumers need to take a good look at their superannuation and make sure it’s in order to make sure they’re not breaching any of these new laws,” he said.

Brisbane psychologist Maureen Burke had to set up a new superannuation accumulation fund because she hit the $1.6m cap after selling her family home and putting the proceeds into super.

Dr Burke, who had planned to retire at the time of the global fin­ancial crisis but kept working part-time to maintain financial security, said she was angry at the cost of seeking financial advice and maintaining another superannuation account.

“Superannuation was to help Australians work towards a self-funded retirement,” she said. “Now they are pulling the rug from under us and accusing us of being tax dodgers. It has eroded any trust and certainty in the system.”

A spokesman for Revenue and Financial Services Minister Kelly O’Dwyer said industry bodies had been regularly consulted since late last year and SMSFs had received some administrative concessions while they adapted to more onerous reporting requirements.

Self-managed Independent Superannuation Funds Association director Duncan Fairw­eather said Ms O’Dwyer had rejected the association’s earlier request for an amnesty period to the end of 2017.

Make Future Fund the default superannuation fund

The Australian

19 August 2017

Alan Kohler

The government is thinking about whether, and how, to turn the Future Fund into a national default superannuation fund. They should get on with it — it’s a good idea. Not that it would be simple, or uncontroversial.

For a start the Future Fund doesn’t want to become a national super fund and accept retail money, for fear of losing its status as a sovereign wealth fund and all the immunities that go with that, although it is interested in managing the money.

And the nationalisation of the juiciest part of the superannuation industry (default) would be furiously resisted by all sides, with the semi-socialists in the unions and ALP resisting no less furiously than the finance sector capitalists and the political right.

And yet … Australia’s superannuation system is a gravy train for an army of rent-seekers and a dreadful mess for those it is supposed to serve.

We have a choice of funds, but in reality two-thirds of employees are herded into industry and bank-owned funds based purely on deals between employers and their unions and banks, deals that have nothing to do with the retirement needs of employees.

If it’s a unionised business, the union’s industry fund will usually be mandated in the enterprise bargaining agreement as part of the workplace conditions and therefore compulsory for the workers. If it’s not a unionised workplace, the fund will probably be the bank, using the leverage of the overdraft.

What’s more, every time workers change jobs, they end up in another default fund unless they take action to sidestep the new employer’s union or bank deal and assert super fund choice. Most don’t bother and end up with multiple funds — and fees. The employee gets to find out in 40 years whether the result of a succession of employers’ cosy deals with unions and banks were good ones.

The Productivity Commission recognised in its draft report into the super industry in May that there is “market failure”, caused by “paternalism … and historical overhang”, and proposed four options, all designed to improve transparency and competition. The final report is due soon and presumably will repeat the options.

As I understand it, the government is reluctant to go down this path, either because it fears the hated industry funds will end up winning since their performance is better than the bank-owned ones or, worse still, the banks end up winning because their sales culture is more aggressive, or both.

The fundamental problem is there is too much variety and choice in a service paid for now but delivered in decades. More information and competition won’t help because it is impossible to make any kind of choice about a fund when the funds themselves say that past performance is not a guide to future performance.

Retirement saving is not a financial service like banking, which is paid for and delivered concurrently: you can see immediately whether you are getting a competitive interest rate or good service. With super you don’t know for decades.

In the absence of any basis for making an informed choice on behalf of their workers, employers naturally go with convenience — they slide super into the industrial arrangements or the banking relationship. The question is how to fix this when the usual solution to everything — competition and choice — won’t work. Increasingly, it’s clear the answer might lie with the Future Fund, which   was set up by the Coalition government and is beloved by it. In fact it’s probably the only fund the Coalition does like. It is also one of the nation’s best-performing funds, returning 7.8 per cent a year over the past 10 years, including the global financial crisis. The average balanced superannuation fund return, according to ChantWest, has been 4.8 per cent over the same period. The difference in retirement outcomes is staggering. Someone saving $500 a month for 40 years and earning a return of 4.8 per cent would end up   with $724,360. At a return of 7.8 per cent, the same savings plan delivers $1.6 million.

In other words, as things stand, the average super fund member in Australia still has to rely on the age pension when they retire; if the Future Fund were used instead, and going by past performances, the pension would hardly be needed at all, by anyone. Most peoples’ lives, not to mention the federal budget, would be transformed.

So the urgent question is: how can the Future Fund be used for default superannuation?

Easy. The government should create an agency to collect the money and employ the Future Fund to manage it. The National Superannuation Fund would manage member services, payments and liquidity risk and the Future Fund would be required to manage this money in the same way it manages the government’s money now. The Future Fund itself would retain its all-important    sovereign immunities.

The bigger, more difficult, question is whether the NSF would be the only default fund — a quasi-nationalisation of the default sector — or just another option, a sort of default fund.

I think it would be far better if it were the former. Inserting the Future Fund into the system as yet another choice would just make things worse, and employers under pressure from unions and banks would ignore it. But of course, the outcry if that happened would be something to behold.

Default superannuation is Australia’s great gravy train, one of the greatest in the world, probably in history, at least since the East India Company’s government concession was dissolved in 1874.

And that’s the heart of the problem: it’s a 9.5 per cent personal income tax that’s handed over each month to the private sector. It is time the government kept that money, instead of handing it over to the private sector to be fought over.

Alan Kohler is publisher of The Constant Investor

Comment by Save Our Super:

We wonder how long such a fund would withstand political meddling for ‘visionary’ objectives yielding “inestimable benefits” (Stephen Conroy on the NBN).

Tax system geared against rewarding hard work

The Australian

8 August 2017

Judith Sloan

From the point of view of the economy, there is no doubt that hard work is a good thing. Encouraging work effort means there are more people prepared to take jobs and more people willing to put in and work long hours.

Of course, from the point of view of the individual and family, it is a balancing act: achieving the appropriate work-life balance as well as being rewarded (or not penalised) for working extra hours. But here is the nub of our problem: our income tax system is designed to discourage hard work. In combination with the welfare system and the withdrawal of benefits at certain income points, we have the worst of both worlds: people are discouraged from working harder and/or moving into the next income tax bracket.

It comes as no surprise that the proportion of workers working very long hours, defined as 45 hours or more, has fallen in the past 15 or so years. In 2002, 37 per cent of male workers reported working very long hours; last year, the proportion had fallen to 30 per   cent. (Women workers are much less likely to work very long hours, with the latest recorded proportion being fewer than 10 per cent.)

It should also come as no surprise that people of all political persuasions recognise the strong disincentives in the system. When your pay moves from $18,200 to $18,201 you are up for 19c tax in the extra dollar, although just to complicate matters, if you earn less than $20,542, you are entitled to the Low Income Tax Offset.

Arguably, the worst trap in the system is at annual income of $87,000 when a dollar more leads to 32.5c tax on the extra dollar compared with the previous marginal tax rate of 19c.

And if Labor has its way and the additional Medicare Levy of 0.5 percentage points applies to only those earning more than $87,000, this will add an extra $435 for that extra dollar of earnings. This will set a world-record in term of an effective marginal tax rate.

But it’s not just the tax system that is deterring work effort, it is also the withdrawal of family benefits and, from next July, of childcare fee subsidies as family income rises. And then there are those hardworking small businesses that organise their affairs around a discretionary trust.

Labor wants to increase the tax on the beneficiaries of the trust by at least 50 per cent by imposing a minimum 30 per cent tax on trust distributions. The bottom line is that whoever is the government, there is an urgent need to reconsider the tax and welfare system and the disincentives it throws up for hard work.

The tax-free threshold is too high, the marginal tax rates are too high and the interaction with the welfare system discourages participation of the secondary worker within families. Throw in changed taxation on trusts, a distorted implementation of a higher Medicare Levy under Labor (and don’t even get me on to super) and you have recipe for lower workforce participation, reduced working hours and shorter working lives.

(Emphasis added by Save Our Super)

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