Aaron Hammond

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A Stronger And Cleaner Economy, Powered By Super

3 November 2021

JIM CHALMERS MP SHADOW TREASURER MEMBER FOR RANKIN

ADDRESS TO THE ACTU VIRTUAL SUPER TRUSTEES FORUM

It’s always a pleasure to be invited to address this Trustees Forum, something I’ve done most years now I think since about 2015. I’m grateful for that and for the opportunity to work closely with you, and for your work with Stephen Jones and our economic team.

Today I want to talk about climate change. But this gathering being so close to the election also gives us a good opportunity to first take stock of where we’ve been more broadly, and where we’re headed. The story of our economy and our super sector are so deeply intertwined over the last decade or so and will be even more so into the future.

Even though super played such an integral role in helping see Australia through the Global Financial Crisis, the Liberals upon coming to government froze the Super Guarantee.

When that freeze was followed by weaker wages growth, and when Australian GDP growth over the past eight years was the most tepid since the 1930s, driven in part by weak investment, the Liberals have still spent much of their time in office attacking super.

Last year, during our first recession in 30 years, they came after super with an early access scheme that bled $36 billion from super balances. And they had a good, long look at another freeze to the SG as well. My point is that at every juncture, the answer to every question, every challenge presented to this government in the economy, has been to blame and attack and diminish super.

This is partly out of envy at Labor’s creation, partly because it’s a partnership model bringing workers, unions and business together, but mostly out of blind, ideological recklessness. What makes this especially dangerous is that we need to get everything right if we are to avoid the future painted by the Treasury’s Intergenerational Report – which forecasts an economy smaller, slower, older, more stagnant over the next forty years than the last forty.

The Next Election is a Referendum on Super So that’s the context. I want to pay tribute to all of you, Scott Connolly and the ACTU, funds and peak groups – everyone who has mostly held these attacks at bay. Securing the legislated increases to the super guarantee this year was a fight we shouldn’t have had to have, but a win worth celebrating. We have won more battles than we’ve lost. And occasionally, even, a policy win – like the legislation introduced last week to remove the $450 minimum threshold for the super guarantee, which we have long supported and took to the last election as policy.

We thank you for championing this policy to protect and support those who would likely suffer the most from the falling living standards that have become a consequence of this Government’s failings – especially when it comes to low-paid working women. But you and I know, we’ve been around long enough to understand, that any victory is just another stay of execution. There’s always another attack just around the corner.

That’s why this next election is about super. It’s a referendum on whether super should be central, or sidelined. Built up or torn down. Because retirement incomes are never safe from a government in which the extremist anti-super tail wags this lightweight Treasurer. Not safe from the stagnant wages this government has said is a ‘deliberate design feature’ of its economic policies – remembering wage stagnation has a devastating impact on super balances as well.

So if the Coalition is re-elected: there’ll be more attacks on super; more attacks on wages; more attacks on Medicare; more attacks on living standards; and more attacks on the working families of middle Australia. That’s the risk attached to an eight-year-old government asking for another three years.

Super is a Solution, Not the Problem
Any objective observer knows super has been our big advantage; our economy’s saving grace. During the GFC, around 150 Australian businesses were able to secure almost $120 billion in new equity to support their growth – and almost half of that came from the super sector.

Despite the past 8 years of otherwise weak investment, super has remained a vital source of funding for our businesses and projects. In June this year, 13 per cent of APRA-regulated superannuation funds was allocated to property and infrastructure investments. That is more than $280 billion to support our fast-growing cities, suburbs and regions.
During COVID, super funds provided billions of dollars in recapitalisation and critical business credit and loans to Australian companies and private businesses, helping to absorb the economic shocks. This put downward pressure on the cost of capital for businesses, sandbagged the national economy, saving local jobs, and generated value for fund members.

Over the 12 months to June 2021, there was almost a 15 per cent increase in total superannuation assets. And in the future, Australian super assets are set to grow from $3.3 trillion today to around $34 trillion by 2060, which means from 157 per cent to 244 per cent of Australian GDP. Anyone who looks at the magnitude of this opportunity and wants to wind it back has got rocks in their head. Why would we undermine this source of business investment, dignity and
spending in retirement, and sustainable long-term growth? In 2020, Australia had the third largest pool of pension assets in the world as a proportion of GDP, ahead of the US and UK – and the fourth or fifth biggest overall.

Over the past 20 years, Australia has experienced the greatest asset growth of any pension market, growing by 11.3 per cent. Critical to this growth has been the compulsory and near-universal nature of the Super Guarantee. It means around a fifth of ASX capitalisation is currently owned by APRAregulated funds. So much more would be possible with a government which sees super at this magnitude as part of the solution to our economic challenges and not
the problem.

Super and Climate Change
Today I want to talk specifically about the opportunities for super in cleaner and cheaper energy and the clean economy more broadly. We know that you invest for the long-term and that means you have a fundamental role to play here. Your primary duty is to invest in your members’ best financial interests. And their best financial interests are served by investing in business and assets that will still be profitable thirty years from now.

This means you are acutely aware of the material financial risk that climate change poses today, and over the decades to come. The RBA, ASIC and APRA all share your views. We know climate change poses a risk to the entire financial system.
Just last month the RBA warned that international investors are increasingly adjusting their portfolios in response to climate risks and that Australia risks facing increasingly higher costs in relation to emissionsintensive activities. So we have no more time to waste.

It’s pleasing to see super playing a role in climate action, particularly the industry funds. We welcome every investment in renewable projects from super, as a much-needed source of capital. We have super funds to thank for investment in WA’s largest operational windfarm, in Melbourne Airport’s recently completed onsite solar farm, and in Ausgrid’s community battery project.

More Transparency on Targets and Plans
We also know that behind the scenes, super funds have had a strong record of engaging with the companies they invest in to ensure greater transparency and accountability.

You’re making a difference. The Australian Council of Superannuation Investors has played a leading role in highlighting which companies have committed to net zero emissions and have established targets and plans to get them there. This year, the number of net-zero commitments more than tripled and now almost half of the ASX 200 has set emissions-reduction targets. This is being driven because investors, particularly the industry super sector, are demanding it. In April 2020, IFM supported shareholder resolutions that Santos and Woodside, two of Australia’s largest oil and gas producers, set short, medium and long-term targets in line with the Paris Agreement. At the end of last year, Santos announced new emissions targets, to reduce their emissions by 26-30 per cent by 2030, and to net-zero by 2040.

But despite your best efforts, we know that there’s only so much that you can do in relation to climate risk disclosure when the existing reporting framework is insufficient, inconsistent and inadequate. We agree that regulators and government should provide clearer guidance on this and what companies should be reporting – and we’ll have more to say about it. Like the RBA, we’d like to see disclosures that are usable, credible and comparable, so that there is a baseline, all around the world, that we can measure against. This will help investors make informed decisions.

Last night, the RBA’s Guy Debelle, who has been leading a lot of this work, explained that the Task Force of Climate Related Financial Disclosures (TCFDs) has got a much more detailed, usable, updated guide to disclosure that is going to be the released as part of COP26. This is likely to emerge as the standard that most countries and companies start adopting – and that’s a good thing.

Policy Uncertainty is a Handbrake on Investment
But a lack of consistent and transparent information is only part of the story. Eight years of Coalition policy uncertainty has been a handbrake on super investment in cleaner and cheaper energy. Funds cannot invest with confidence when a government cycles through 22 different plans in 8 years – the last one little more than a pamphlet. Policy uncertainty pushes up the price of finance. That pushes up the price of new projects and technology. It slows the transition. It also means super funds are increasingly needing to look offshore. So we desperately need policy stability, and clear and ambitious targets, which create certainty for super investments to follow.

Economic modelling for IGCC has shown that Australia would create $63 billion in fresh investment opportunities over the next five years by strengthening climate targets and policies in line with reaching net zero emissions by mid-century. And stronger 2030 policies can unlock $131 billion investment in clean industries and new jobs by the end of the decade.
The biggest impediment to tens of billions of dollars of investment in cleaner and cheaper energy is a Prime Minister who can’t get his head around the opportunities here and whose heart isn’t in it. So many missed opportunities to create real jobs, and real investment, in regional communities and economies. Action and leadership that we know won’t cost jobs but will create them. We know the market is there for renewable energy investments in Australia because it has been growing all around the world. And yet, we’ve been bucking the global trend. Australia is losing another race it should be winning.

S&P Global analysis indicates a passive investment in the ASX200 exposes investors to around twice the carbon exposure per dollar invested than in other major markets. Large investment funds report that if they invest in Australia at all, they
spend around 2-3 times as much capital in projects in the EU, USA and Asia than they do on Australian projects.

But these are the numbers that really stood out for me:
A recent survey of Australian investors managing $1.3 trillion found that 70 per cent of them highlighted policy uncertainty as a key barrier to investment, up from 40 per cent last year. This month, HESTA CEO Debby Blakely said, ‘while we want to invest more here, for every $1 we have invested in Australian renewables, we have $3 committed to equivalent assets overseas. The assets are in countries that provide stable, predictable policy settings, which have
given us the confidence to make long-term investments’.

The BCA also identified “policy certainty” as a key factor currently missing in Australia’s energy investment landscape.
This is a devastating vote of no confidence in Scott Morrison and Josh Frydenberg and the wasted decade of missed opportunities the Coalition has presided over.

Super Can Be Central
I know you all understand this. You know that more investment in cleaner and cheaper energy means more opportunities for more people in more parts of Australia. We need a government that understands this too. That won’t be a fourth term Coalition government led by Scott Morrison and Barnaby Joyce. A first term Albanese government would understand and unlock these opportunities.

We know super belongs at the very centre of the recovery. And that this is a key part to ensuring our economy is stronger and our energy cheaper and cleaner after COVID than it was before.

Politicians don’t want to meddle with super

Australian Financial Review

28 March 2022

Chanticleer – Tony Boyd

Superannuation was once a soft target for politicians trying to raise revenue. They have backed off in the face of changed community perceptions and super’s status as a sacrosanct saving vehicle.

It says a lot about superannuation’s changed perception in the community that politicians no longer see it as a soft target for boosting revenue.

There was a time when the Liberal-Nationals Coalition was willing to waste political capital on opposing the move to a Super Guarantee charge of 12 per cent.

Not any more.

In fact, the Minister for Superannuation, Jane Hume, tells Chanticleer in the clearest terms possible that “there will be no increase in super taxes under a Coalition government”.

“There will be no sneak tax increases via by making it more difficult to put money into super under a Coalition government,” she says.

With an eye to potentially wedging Labor over the policies it took to the last election, Hume says there will be no adverse changes to super taxes, no adverse changes to contribution limits, and definitely no changes to the government’s contribution flexibility measures.

She says there will be no changes to catch-up contributions and concessions for a couple downsizing to a smaller house to put an extra $300,000 into super.

The Coalition will not meddle with the ability of retirees up to the age of 74 to make contributions without meeting the work test.

Also, Hume says there will be no adverse changes to the Division 293 tax threshold, which imposes a $250,000 upper limit before the 15 per cent contribution tax comes into play.

Whenever Opposition Leader Anthony Albanese has been asked about Labor’s previous tax policies, he has responded with the phrase: “It is not our policy until we announce it.”

Opposition treasury spokesman Jim Chalmers tells Chanticleer: “We’ve said consistently that we won’t take the same policy agenda to this election that we took to the last election.

“All of our policies will be clearly set out before the election.”

But that is not a denial. It is pretty clear that a decision is yet to be made on these issues, which could potentially boost Labor’s revenue by multiple billions of dollars.

Doing nothing

With about six weeks to go before the election, there is still time for Hume to wedge Albanese and Chalmers, but that pressure is most likely to be greeted with a commitment by Labor to do nothing.

Super’s ascension to a position beyond the reach of politicians seeking revenue matches changing community attitudes, which are well summed up in research by CT Group.

The research, which was commissioned by the Association of Superannuation Funds of Australia, found that super was not on the issue agenda for the vast majority of Australians.

“Australians believe that more money should be saved for their retirement, not less,” the research found.

Although many are concerned they might not have enough money saved to live well when they retire, they are also concerned that others who don’t save might become a burden on taxpayers.

Australians are happy with the performance of their super funds and there is strong support for not allowing early access to super across the full spectrum of different demographic, socio-economic and voter groups.

“The industry is viewed highly favourably, and Australians are satisfied with how the industry is performing across a range of key metrics,” the research found.

“There is high support for maintaining the legislated increase in the Super Guarantee to 12 per cent, and high support for ensuring that any additional super contributions are taken as compulsory retirement savings.”

Budget 2022: Treasurer reassures retirees as budget super tax fight looms

The Weekend Australian

26 -27 March 2022

GEOFF CHAMBERS CHIEF POLITICAL CORRESPONDENT

Self-funded retirees will be allowed to store more cash in their nest eggs to shield them against global security threats and market volatility, as Josh Frydenberg sets up a budget clash with Labor over superannuation tax.

Ahead of delivering his fourth budget and the government’s cost-of-living package, tipped to include $250 payments and a temporary cut to fuel excise, Mr Frydenberg made a pre-election pledge that the Coalition will not “increase superannuation taxes”.

Announcing an extension of the 50 per cent reduction in minimum drawdown requirements to mid-2023, impacting about 1.8 million superannuation accounts, the Treasurer said his message to older Australians was “your super is safe with us”.

“This will provide retirees with greater flexibility and certainty over their savings. We recognise the valuable contribution self-funded retirees make to the Australian economy and the sacrifices they made to provide for their retirement,” Mr Frydenberg said.

“At this election, we are again saying to retirees – under a Morrison government there will be no increased superannuation taxes.

“It’s not a guarantee Labor can be trusted to match. Labor sees success as something to be taxed, not celebrated.

……”

A 1976 deed can’t be found … trust fails as a result!

2 December 2021

By Bryce Figot, Special Counsel, and Daniel Butler, Director, DBA Lawyers

A recent case (Mantovani v Vanta Pty Ltd (No 2) [2021] VSC 771) sheds light on the implications of lost trust deeds. Advisers who work with SMSFs (or family trusts or any form of trust established by deed) should be aware of its implications.

In short, due to a lost deed, a family trust was ordered to have failed. The assets of that trust were ordered to be transferred back to the deceased’s estate of the person who had transferred them to the trust over 40 years earlier!

Facts

Teresa was the matriarch of the Mantovani family. She had four children, who are now all in their 60s.

Sometime in 1976 a family trust was created with a company called Vanta Pty Ltd acting as trustee. A schedule — which all parties accepted as accurate — stated that the settlor was Teresa’s father. Although the schedule was available, no other portion of the deed was available, despite extensive searches.

In the late 1970s and early 1980s Teresa transferred several real estate titles to Vanta Pty Ltd as trustee for the family trust.

In 2015, Teresa died. All parties agreed that the family trust had been created and that Vanta Pty Ltd owned the real estate as trustee of the family trust.

One of Teresa’s four children (Giovanni) was the plaintiff in this case. Giovanni had lived in the one of the family trust’s properties for the entirety of his life. Giovanni asserted that he had spent substantial sums of money maintaining and improving that property. Giovanni deposed that Teresa told him that that property would be his upon her death.

However, Giovanni was not a director of Vanta Pty Ltd. Rather, two of Giovanni’s siblings were directors (Nicola and Salvatore).

Accordingly, at its core, this case is possibly a dispute between siblings: Nicola and Salvatore appeared to maintain that Giovanni’s home was part of the trust and stated that it was unclear whether Giovanni was a beneficiary of that trust. They did not appear to want to treat the property as part of Teresa’s estate.

Giovanni on the other hand sought a declaration that the family trust failed due to the lost deed and that all assets by Vanta Pty Ltd actually formed party of Teresa’s estate.

Findings

All accepted that the family trust had been established and that the establishing deed at least at some stage existed, even if the deed couldn’t be found now. The schedule and the way the financial statements and income tax returns had been prepared were evidence of what the deed’s contents might have been.

However, McMillan J found that if the trust was allowed to continue on the balance of such evidence, the administration of the trust would involve ‘mere guesswork’.

McMillan J noted that where the contents of a trust deed cannot be ascertained, the trustee cannot discharge its obligation to act in strict conformance with the terms of the trust.  Accordingly, she held that the trust failed.

Teresa was not the settlor of the family trust. However, she had provided of the bulk of the trust property. Accordingly, McMillan J held that the properties that she had transferred to the family trust were effectively still Teresa’s and formed part of Teresa’s estate!

Trust or SMSF deed updates

There are many document suppliers these days that offer trust or SMSF deed updates that either do not review prior deeds or have non-qualified lawyers review these documents in a superficial manner. Varying or updating trust and SMSF deeds can involve considerable complexities as outlined in our recent newsfeed articles Discretionary trusts – variations and issues and Variation powers — lessons from Re Owies Family Trust [2020] VSC 716.

DBA Lawyers can review the entire document trail and provide feedback on any weaknesses, shortcomings or issues in relation to a trust or SMSF’s document trail.

One popular service we offer is our SMSF Deed History Review service. Almost all SMSF strategies and arrangements rely on a ‘firm foundation’ being the trust deed. The trust deed is like the foundations of a house. Unless you have firm foundations, the house may prove shaky and be blown down by rough weather. Having a robust deed is very important for many SMSF strategies including pensions, binding death benefit nominations, and determinations of who eventually gets control of the fund on death, separation of a relationship, and any other disputes. Thus, it is important to ensure the fund’s governing rules provide a firm foundation for every SMSF.

Note that an SMSF’s governing rules also require all prior deeds, rules, and changes of trustee to be validly prepared, executed, and, if necessary, stamped, in compliance with prior variation powers, relevant consents, and appropriate legal formalities. All these formalities must have been complied with in the document trail otherwise the fund’s governing rules may be invalid and ineffective.

Implications

The implications of this decision are significant. Basically, the implications appear to be that if a deed is lost — unless there is clear and convincing evidence of the exact contents of the deed — all trust property might be transferred back to the person who transferred it to trust in the first place.

In the facts of this case, this outcome seems quite sensible. However, it poses many questions in the context of an SMSF.

What if the contributor was an employer? Surely an employer should not receive any super contributions back simply because an employee has lost the employee’s own SMSF deed? (Deeds can exclude the presumption of resulting trust to minimise the risk of this happening.)

What if the deed that is lost was the establishing deed but a subsequent deed is available? Presumably that subsequent deed would represent the governing rules of the SMSF and the SMSF would not fail, but that is not entirely clear or certain.

Also, would the outcome have been different if the trustee had made an application prospectively, rather than waiting for a disgruntled beneficiary to make an application? At paragraph 100 there is suggestion that a different conclusion might have been reached had the trustee been more diligent and proactive in seeking judicial input.

A lost trust deed is a significant issue for an SMSF or a family trust. There are practical ‘stop gap’ measures available, such as drafting a deed update purporting to implement new governing rules, but there is no certainty that such measures will definitively be effective. The greatest certainty is obtained via a court order … however, when applying for a court order, there is no guarantee that the court will actually grant the order! For example, Re Barry McMahon Nominees Pty Ltd [2021] VSC 351 was a somewhat similar case that involved a trust with a lost deed. There, the court ordered that insufficient inquiry had occurred and the trustee should conduct additional searches and then file further evidence with the court.

Conclusion

In short, a lost trust deed is not a mere procedural or administrative matter. It will cause risk and uncertainty for the life of the SMSF or trust. There can be tremendous merit in obtaining a tailored legal solution in these circumstances. Indeed, obtaining appropriate legal advice in a timely manner can minimise risk, cost and uncertainty; some however seek to defer the issue hoping the risks will go away and never surface.

This article is for general information only and should not be relied upon without first seeking advice from an appropriately qualified professional.

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ATO focus on CGT relief may have big impact on SMSFs

26 November 2021

By Shaun Backhaus, Senior Associate, and Daniel Butler, Director, DBA Lawyers

The ATO recently issued a statement noting that there has been an increased number of taxpayers mistakenly claiming capital gains tax (CGT) small business concessions (refer: ATO QC 67318).

As a result, the ATO is now actively following up those who have claimed CGT small business concessions advising them to ensure that they meet the eligibility conditions and have the necessary records to substantiate their claims and recommending their tax advisers check their past tax returns for accuracy.

Background

The CGT small business concessions involve complex legislation (see div 152 of the Income Tax Assessment Act 1997 (Cth) (ITAA 1997). In particular, it is important for SMSFs in receipt of contributions that have been made as a CGT cap amount under s 292-100 of the ITAA 1997.

Under the CGT cap, you can potentially exclude non-concessional super contributions from your non-concessional contributions cap up to the CGT cap amount. For the current financial year 2021‑22 the CGT cap amount is $1,615,000.

A person eligible to claim CGT small business relief may be eligible to contribute up to $500,000 to superannuation if they satisfy the retirement relief criteria in division 152-D of the ITAA 1997. If they satisfy the criteria in the 15 year rule in division 152-B of the ITAA 1997 they may be eligible to contribute up to $1,615,000 to superannuation. These amounts are typically in addition to any other contributions that they may be eligible to make.

However, given the complexity of these CGT provisions, if the relevant legislative criteria in division 152 are not satisfied, then the superannuation contribution made as a CGT cap amount, will be counted as a non-concessional contribution (NCC). This may result in the member exceeding their normal contribution caps.

This position is made even worse if the member has more than $1.6 million in their total superannuation balance as they have no cap space, and any further contribution could be in excess of their cap. (Note from 1 July 2021 the total superannuation balance was indexed to $1.7 million.) Members can easily run into excess contributions territory if CGT relief is incorrectly claimed.

If there is an incorrect contribution to super, ie, where the CGT relief was mistakenly applies, the member’s first instinct to rectify the mistake is usually to withdraw the contribution from their super fund. However, before any withdrawal is made, you must first learn how to manage the excess contribution system. We recommend expert advice be obtained to minimise the risk of 45% tax being applied to any excess amount.

ATO hit list

The ATO provided the following list of situations that will attract its attention, including:

  • entities that fail the small business entity test (eg, their aggregated turnover is greater than $2 million);
  • entities that fail the maximum net asset value test – net assets of the entity, connected entities and affiliates exceeds $6 million and these tests can prove quite complex;
  • the asset disposed of does not meet the definition of an active asset – refer to the discussion below on Eichmann v Commissioner of Taxation [2020] FCAFC 155 (Eichmann);
  • entities that do not meet the additional conditions where the CGT asset is a share or trust asset; and
  • entities that fail to correctly identify significant individuals and CGT concession stakeholders.

Tax adviser actions

The ATO is actively encouraging tax advisers to check all or their clients’ CGT relief claims to ensure their accuracy and to correct any error as soon as practicable. Moreover, the ATO has stated that to ensure CGT concession eligibility and to avoid administrative time and cost to correct a mistake, tax advisers are able to:

  • reach out to the ATO for an early engagement discussion to seek advice on a client’s small business complex transaction;
  • seek a pre-lodgement compliance agreement for a client’s commercial deals and restructure events; and/or
  • apply for a private ruling to attain certainty on a client’s position.

Recent case (Eichmann) on what is an active asset

One good example of a case involving CGT relief was Eichmann that examined whether a block of land used to store business equipment adjacent to Mr and Mrs Eichmann’s family home was used in the course of carrying on a business.

This case illustrates the difficulty of correctly applying the CGT small business concessions especially if the ATO disagrees with your claim. If the ATO disagrees with your claim, who is correct and who wins may eventually depend on who is prepared to fight it out and ultimately win the dispute.

In December 2016, Mr and Mrs Eichmann applied to the ATO for a private ruling. The ATO ruled that the real estate was not used in the course of carrying on a business and therefore not an ‘active asset’ under s 152-40 of the ITAA 1997. The taxpayer objected.

In July 2017, the ATO reaffirmed its ruling. The taxpayer appealed to the Administrative Appeals Tribunal, and in February 2019, the tribunal ruled that the real estate was used in the course of carrying on a business.

The ATO appealed to the Federal Court, and in December 2019, the Federal Court overturned the tribunal’s decision. The taxpayer then appealed to the Full Federal Court. In September 2020, the Full Federal Court ruled that the real estate was used in the course of carrying on a business (ie, that the ATO had been wrong from the beginning).

This illustrates that even if a taxpayer is ultimately right, it can take years and considerable costs to prove your case.

Also, if a taxpayer loses the desire or ability to dispute the matter after, for example, the Federal Court decision but before the Full Federal Court decision, the taxpayer would have been ultimately wrong instead of being ultimately right. Losing the desire or ability to dispute a matter (eg, the costs are too much or its not cost effective to proceed further) is a real possibility due to the extreme costs of a dispute (eg, hundreds of thousands of adviser costs can easily be incurred in this type of case).

If a taxpayer loses a court case, the taxpayer also typically has to pay a portion of the other side’s legal fees. Even if a taxpayer ultimately wins a court case, the taxpayer may still have significant out of pocket expenses and will need to ensure the cost/benefit of proceeding further is justified given the chance of success and the risks involved. Furthermore, a dispute with the ATO can be tremendously stressful and time-consuming. The emotional toll of a protracted dispute with the ATO should not be underestimated.

Therefore, the need to obtain proper advice upfront, that is in writing, fully documented and supported, before claiming CGT relief is strongly recommended. Advisers who do not have a well‑documented file with appropriate evidence are at risk. The ATO review is a reminder for advisers to encourage their clients to get the review done and documentation checked or face the consequences.

Conclusions

DBA Lawyers generally recommends that individuals seek upfront advice from a tax expert in relation to claiming CGT relief due to the complexity, risks and increased scrutiny of these claims by the ATO. It is especially important to ensure that this advice is in writing and is well documented and supported. This will ensure that taxpayers are in a much sounder position and can hold their adviser accountable if the advice given turns out to be incorrect.

If there are any errors, early engagement and voluntary disclosure and working cooperatively with the ATO is generally the best way forward. Naturally, its best to obtain advice from a lawyer with tax and superannuation expertise in this situations as legal advice is covered by legal professional privilege.

This article is for general information only and should not be relied upon without first seeking advice from an appropriately qualified professional.

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Non-arm’s length income – A history and overview

26 August 2021

By Shaun Backhaus, Senior Associate and Daniel Butler, Director, DBA Lawyers

Non-arm’s length income (NALI) has recently become one of the hottest and most contentious topics in the superannuation industry that impacts both large APRA and self managed superannuation funds (SMSFs).

This is largely due to the finalisation of the ATO’s Law Companion Ruling LCR 2021/2, which outlines the ATO’s view of the application of the new non-arm’s length expenditure (NALE) provisions. The ATO’s interpretation regarding NALE, especially its view that a general fund expense has a sufficient nexus to all of a fund’s ordinary and statutory income (including capital gains and concessional contributions), has given rise to a refocus on NALI and how NALE is linked to NALI.

While NALE is currently in the spotlight advisers also need to be on top of the different heads of possible exposure under the NALI provisions. This technically speaking bulletin goes back to the basics of the NALI provisions and provides an overview of these provisions. Given the ATO’s views reflected in LCR 2021/2 every SMSF adviser should have a good understanding of NALI and NALE as these provisions can readily apply in many SMSF contexts. Failure to properly consider these aspects may result in an SMSF being taxed at 45% and leave advisers exposed to liability.

Current law and types of NALI

Broadly, there are four different types of NALI covered in s 295-550 of the Income Tax Assessment Act 1997 (Cth) (ITAA 1997). We will refer to these as:

  • General NALI (includes NALE) found in s 295-550(1);
  • Dividend NALI found in s 295-550(2) and (3);
  • Non-fixed trust entitlement NALI found in s 295-550(4); and
  • Fixed trust entitlement NALI found in s 295-550(5).

Section 295-545 provides that the taxable income of an SMSF is split into a non-arm’s length component and a low tax component. While the low tax component of a superannuation fund is subject to a 15% rate of tax (or zero on assets in pension or retirement phase) the non-arm’s length component is subject to a 45% tax rate (Income Tax Rates Act 1986 (Cth), s26).

Background to NALI

Section 273 of the Income Tax Assessment Act 1936 (Cth) (ITAA 1936) was initially introduced to counter higher than arm’s length dividends in private companies being paid to superannuation funds and to counter certain other non-arm’s length transactions.

On 25 November 1997 the ITAA 1936 was expressly amended so that NALI caught certain trust distributions to superannuation funds. Insight into what strategies were developing in practice at the time were noted in Allen (Trustee), in the matter of Allen’s Asphalt Staff Superannuation Fund v FCT [2011] FCAFC 118 (Allen’s) at [60] where the following extracts from the explanatory memorandum to the Superannuation Legislation Amendment Bill (No 2) 1999 (Cth) appear:

2.14  The ATO has become aware of arrangements which circumvent section 273. Under the arrangements, pre-tax income of a trust (usually a discretionary trust) is distributed to a complying superannuation fund set up for the benefit of the beneficiaries of that trust rather than to the beneficiaries themselves. The effect of the arrangements is that the income is taxed at only 15% as income of the superannuation fund rather than at the marginal rate of tax applicable to other beneficiaries.

2.15  It is doubtful whether subsection 273(4) of the ITAA 1936, which seeks to tax income derived by a superannuation entity from a non-arm’s length transaction at the non-concessional rate of 47%, would catch these discretionary trust distributions.

Note that the rate applicable to NALI in late 1999 was 47%.

Section 273 from 25 November 1997 largely remained unchanged until mid-2007 when it was replaced by s 295-550, which took effect on 1 July 2007. The mid-2007 superannuation reforms broadly resulted in pt. IX of the ITAA 1936 being replaced by pt. 3-30 of the ITAA 1997 and s 295 550 was largely a restatement of s 273 of the ITAA 1936 in more modern language. As set out in TR 2006/7, to the extent that s 295-550 expresses the same ideas as s 273 of the ITAA 1936, the ruling is also taken apply to s 295-550.

Section 295-550 taxes trust distributions as NALI by reliance on much the same wording as in s 273(6) and (7) which are now reflected in s 295-550(4) and (5). However, s 295-550(1) from 1 July 2007 expressly covers statutory income (eg, assessable capital gains and franking offsets) as well as ordinary income. It is interesting to note that s 295-550(4) and (5) still refer to ‘income’ rather than ‘ordinary income’ and ‘statutory income’. (It is not clear if this was an oversight by the draftsperson or an intended outcome given that the Allen’s decision broadly held that ‘income’ in s 273, being an anti-avoidance provision, included an assessable capital gain (ie, statutory income). Note that the decision in Allen’s case was decided after the High Court’s decision in F C of T v Bamford & Ors; Bamford & Anor v F C of T [2010] HCA 10 which confirmed, broadly, that the term ‘the income of the trust estate’ has ‘a content found in general law of trusts’ (broadly, that ‘income’ means ‘ordinary income’ and not ‘statutory income’).

In 2018, Treasury carried out a consultation process regarding changes to the NALI rules as part of the Superannuation Taxation Integrity Measures Consultation Paper. Treasury considered that the rules in place did not take into account fund expenditure incurred that would normally apply in a commercial transaction. The 2018 consultation paper and exposure draft legislation was aimed at assessing non-arm’s length related party limited recourse borrowing arrangements (LRBAs).

After an initial bill lapsed in 2018, the Treasury Laws Amendment (2018 Superannuation Measures No. 1) Bill 2019 (2019 Bill) received royal assent on 2 October 2019. The 2019 Bill re-cast ss 295-550(1) and (5) to expressly provide for arrangements where a Super Fund trustee incurred no expenses or lower expenses than might have been expected had they been dealing at arm’s length.

General NALI

Section 295-550(1) provides:

(1) An amount of ordinary income or statutory income is non-arm’s length income of a complying superannuation entity if, as a result of a scheme the parties to which were not dealing with each other at arm’s length in relation to the scheme, one or more of the following applies:

(a) the amount of the income is more than the amount that the entity might have been expected to derive if those parties had been dealing with each other at arm’s length in relation to the scheme;

(b) in gaining or producing the income, the entity incurs a loss, outgoing or expenditure of an amount that is less than the amount of a loss, outgoing or expenditure that the entity might have been expected to incur if those parties had been dealing with each other at arm’s length in relation to the scheme;

(c) in gaining or producing the income, the entity does not incur a loss, outgoing or expenditure that the entity might have been expected to incur if those parties had been dealing with each other at arm’s length in relation to the scheme.

This subsection does not apply to an amount to which subsection (2) applies or an amount * derived by the entity in the capacity of beneficiary of a trust.

The General NALI provisions are very broad and importantly, are not concerned with the actual amount of the benefit obtained by an SMSF above what would have occurred had the parties been dealing at arm’s length but rather that the amount of income is higher (or expense lower). That is, the provisions do not take a proportional approach to the amount but rather deem all income from the arrangement to be NALI.

The first step for the General NALI provisions to be applied is to determine whether a ‘scheme’ exists.

The definition of scheme in s 995-1 of the ITAA 1997 is so broad as to provide little assistance. It provides:

“scheme” means:

(a) any arrangement; or

(b) any scheme, plan, proposal, action, course of action or course of conduct, whether unilateral or otherwise.

Based on this definition, in practice it can usually be assumed that the SMSF trustee is a party to a scheme. At times, identifying what steps or actions form the relevant scheme and the parties to the scheme can be contentious.

The second step is to determine whether the parties to the scheme were dealing at arm’s length. Section 995-1 of the ITAA 1997 provides the following as a definition of arm’s length:

“arm’s length”: in determining whether parties deal at arm’s length consider any connection between them and any other relevant circumstance.

It has been said that this definition contains a direction about how to determine whether parties are dealing at arm’s length rather than a definition or explanation of the expression (The Trustee for MH Ghali Superannuation Fund and Commissioner of Taxation [2012] AATA 527 (Ghali), [48]).

A useful explanation of ‘arm’s length’ is APRA v Derstepanian (2005) 60 ATR 518, [18]):

… a dealing that is carried out on commercial terms. … a useful test to apply is whether a prudent person, acting with due regard to his or her own commercial interests, would have made such an investment

Another explanation was provided in Granby Pty Ltd v FCT [1995] FCA 259 as follows:

… the term “at arm’s length” means, at least, that the parties to a transaction have acted severally and independently in forming their bargain.

As noted above, in LCR 2021/2, the ATO view is that NALE that is a lower general fund expense taints all of a fund’s ordinary and statutory income as NALI (see para 19). In contrast, the ATO’s view is that where NALE is incurred to acquire an asset (including associated financing costs) it will have a sufficient nexus to all ordinary or statutory income derived by the fund in respect of that asset (see para 18).

The ATO’s PCG 2020/5 states that:

The ATO will not allocate compliance resources to determine whether the NALI provisions apply to a complying superannuation fund for the 2018-19, 2019-20, 2020-21 and 2021-22 income years where the fund incurred non-arm’s length expenditure (as described in paragraphs 9 to 12 of LCR 2019/D3) of a general nature that has a sufficient nexus to all ordinary and/or statutory income derived by the fund in those respective income years (for example, non-arm’s length expenditure on accounting services).

The ATO proposes further administrative relief from 1 July 2022 in the Appendix to LCR 2021/2. Paragraph 92 states that in context of general expenses, the ATO’s compliance resources will only be directed:

for an SMSF – toward ascertaining whether the parties have made a reasonable attempt to determine an arm’s length expenditure amount for services provided to the fund, other than services provided by an individual either acting in the capacity as trustee of the SMSF or as a director of a body corporate that is a trustee of the fund

Clearly the General NALI provisions are exceedingly broad and provide the ATO a wide opportunity to apply these provisions in a general anti-avoidance way.

Dividend NALI

Sections 295-550(2) and (3) provide:

(2) An amount of ordinary income or statutory income is also non-arm’s length income of the entity if it is:

(a) a dividend paid to the entity by a private company; or

(b) ordinary income or statutory income that is reasonably attributable to such a dividend;
unless the amount is consistent with an arm’s length dealing.

(3) In deciding whether an amount is consistent with an arm’s length dealing under subsection (2), have regard to:

(a) the value of shares in the company that are assets of the entity; and

(b) the cost to the entity of the shares on which the dividend was paid; and

(c) the rate of that dividend; and

(d) whether the company has paid a dividend on other shares in the company and, if so, the rate of that dividend; and

(e) whether the company has issued any shares to the entity in satisfaction of a dividend paid by the company (or part of it) and, if so, the circumstances of the issue; and

(f) any other relevant matters.

The ATO’s position in relation to private company dividends and NALI is outlined in some detail in TR 2006/7. In TR 2006/7, the ATO explains what amounts are to be considered as ‘special income’ under the former s 273 of the ITAA 1936. (As set out in TR 2006/7, to the extent that s 295-550 expresses the same ideas as s 273 of the ITAA 1936, the ruling is also taken to apply to s 295-550.)

Two notable cases where NALI was applied to dividends derived by an SMSF from private companies include Darrelen Pty Ltd v Commissioner of Taxation [2010] FCAFC 35 (Darrelen) and GYNW and Commissioner of Taxation [2019] AATA 4262 (GYNW).

Darrelen involved a case where an SMSF acquired shares in a private company at less than 10% of the market value of those shares. The dividends in each of the relevant years of income were far in excess of the purchase price which the trustee of the Fund had paid for the shares. In this regard, against an acquisition cost of $51,218 (paid in October 1995), the trustee of the fund received dividends as follows: in the year ended 30 June 1996 – $26,400; in 1997 – $208,136; in 1998 – $140,000; in 1999 – $125,200; in 2000 – $143,720; in 2001 – $143,720; in 2002 – $86,320 and in 2003 – $76,640. The full Federal Court confirmed the Tribunal’s decision that the dividends were to be taxed as NALI.

GYNW involved a case where an employee whose SMSF was provided with favourable terms to acquire shares in the employer’s company. The employee’s SMSF acquired shares at a nominal value of $200 which produced substantial dividends (eg, a dividend of $672,900 with a $288,283.71 franking credit for FY2013, a dividend of $1,050,000 with a $450,000 franking credit for FY2014 and a dividend of $70,000 with a $30,000 franking credit for FY2015; being a total of $1,792,900 in dividends and $768,283.71 in franking credits over three financial years). The Tribunal held that s 290-550 did apply and relied on the analysis of the Full Federal Court in Darrelen. In particular, the Tribunal confirmed that:

  • s 295-550(2) is not limited to an enquiry about the circumstances surrounding the payment of the dividend, but can extend the circumstances surrounding the acquisition of shares;
  • it is not sufficient to merely show that dividends are paid on all shares in the company, including those owned by the SMSF, on an equal basis without preference;
  • regard must be had to all of the factors in s 290-550(3)(a) to (f); not just some of them; and
  • the reference to ‘value’ in s 290-550(3)(a) is a reference to market value.

Broadly, in each of Darrelen and GYNW a careful analysis of each of the factors in s 290-550(3)(a) to (f) was undertaken to determine whether NALI applied to dividends received from the SMSF’s acquisition of shares in a private company. In each case the analysis concluded that the shares had been acquired for less than market value.

Thus, the application of the Dividend NALI provisions provides a relatively structured analysis compared to the General NALI provisions.

Fixed and Non-fixed trust entitlement NALI

Section 295-550(4) provides:

(4) Income derived by the entity as a beneficiary of a trust, other than because of holding a fixed entitlement to the income, is non-arm’s length income of the entity.

Section 295-550(5) provides:

(5) Other income derived by the entity as a beneficiary of a trust through holding a fixed entitlement to the income of the trust is non-arm’s length income of the entity if, as a result of a scheme the parties to which were not dealing with each other at arm’s length in relation to the scheme, one or more of the following applies:

(a) the amount of the income is more than the amount that the entity might have been expected to derive if those parties had been dealing with each other at arm’s length in relation to the scheme;

(b) in acquiring the entitlement or in gaining or producing the income, the entity incurs a loss, outgoing or expenditure of an amount that is less than the amount of a loss, outgoing or expenditure that the entity might have been expected to incur if those parties had been dealing with each other at arm’s length in relation to the scheme;

(c) in acquiring the entitlement or in gaining or producing the income, the entity does not incur a loss, outgoing or expenditure that the entity might have been expected to incur if those parties had been dealing with each other at arm’s length in relation to the scheme.

As can be seen, where the relevant trust provides a ‘fixed entitlement’, there must be greater income derived or a lower (or no) expense incurred before the NALI provisions will be enlivened.

However, where the relevant trust does not provide a fixed entitlement, eg, a distribution from a family discretionary trust, the income received will be NALI. It is generally accepted that distributions from ‘discretionary trusts’ will result in that income being NALI. However, in other types of trusts such as unit trusts, this aspect is not always clear and a careful review of the trust deed is required as there may be units that have some discretion attached.

The High Court in CPT Custodian Pty Ltd v Commissioner of State Revenue (2005) 224 CLR 98 confirmed at [15] that:

However, “unit trust”, like “discretionary trust”, in the absence of an applicable statutory definition, does not have a constant, fixed normative meaning …

The Federal Court in Colonial First State Investments Limited v Commissioner of Taxation [2011] FCA 16 confirmed that a managed investment trust that allowed a 75% vote to amend the constitution of the trust did not qualify as a fixed trust as there was the possibility, although it was unlikely to be exercised, for the majority to dilute the 25% minority’s interests in the trust.

An important practical aspect of TR 2006/7 is the ATO’s view on what is required for a ‘fixed entitlement’. TR 2006/7 provides:

208. Having regard to the statutory context, it is considered that the composite expression ‘income derived … by virtue of a fixed entitlement to the income’ is designed to test whether an amount of trust income … was included because the entity had an interest in the income of the trust that was, at the very least, vested in interest, if not in possession, immediately before the amount was derived by the trustee.

209. To have an interest in the income of a trust estate, a person must have a right with respect to the income of the trust that is susceptible to measurement; … An interest in the income of a trust estate will be vested in interest if it is bound to take effect in possession at some time and is not contingent upon any event occurring that may or may not take place. …

However, ‘fixed entitlement; is defined in s 995-1 of the ITAA 1997 as:

an entity has a fixed entitlement to a share of the income or capital of a company, partnership or trust if the entity has a fixed entitlement to that share within the meaning of Division 272 in Schedule 2F to the Income Tax Assessment Act 1936.

It is generally accepted that the definition of fixed entitlement in s 272-5 of Schedule 2F of the ITAA 1936 would provide a stricter measure of fixed entitlement compared to the ATO’s view in TR 2006/7. The application of the definition of fixed entitlement provided in Schedule 2F of the ITAA 1936 to the NALI provisions was endorsed by the AAT Senior Member in Ghali. In the ATO’s Decision Impact Statement after Ghali, the Commissioner proposed to adhere to his view that the Schedule 2F definition is inapplicable for the purposes of the NALI provisions.

Notably, in PCG 2016/16 at [4] the Commissioner states that his view of fixed entitlement in respect of s 273 of the ITAA 1936 and s 295-550 of the ITAA 1997 is explained in TR 2006/7.

In view of this analysis, we recommend that a fixed unit trust should be used where an SMSF invests in a unit trust as many unit trusts include some form of hybrid or discretion that may not qualify as a fixed entitlement especially if the Commissioner’s current administrative view changes.

Conclusions

The NALI provisions have broad application which has been extended considerably further with the ATO’s interpretation of the NALE amendments. In recent years there has been an increased focus on NALI and where these provisions apply and it can prove costly, time consuming and challenging to respond to an ATO assessment raising NALI.

Advisers should view every SMSF transaction involving a related party carefully and through the lens of a potential application of the NALI provisions. In this way, advisers will provide an important first barrier to obvious non-arm’s length transactions going ahead that may save their clients plenty of distress and money.

Disclaimer and legal notice

This article is for general information only and should not be relied upon without first seeking advice from an appropriately qualified professional. Note the law is subject to constant change, and accordingly, expert advice should be obtained if there is any doubt in relation to this document. Unless specifically instructed by you in writing, and subject to you entering into an ongoing client agreement and payment of our required yearly fee, there is no obligation whatsoever on DBA Lawyers to notify you in respect of any changes to the law, ATO policies, etc and how any such changes might impact upon the above information. Copyright belongs to DBA Lawyers and DBA Lawyers are not licensed to provide financial product advice under the Corporations Act 2001 (Cth).

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APRA super heatmaps reveal a quarter of choice super products ‘poor’

The Weekend Australian

18-19 December 2021

Richard Gluyas – Business Correspondent

The Australian Prudential Regulation Authority’s review of superannuation member outcomes revealed that poorly performed choice products were concentrated in the hands of eight trustees.

More than 60 per cent of investment options in the prudential regulator’s first heatmap for the choice superannuation sector failed to meet benchmarks, with one-quarter delivering “significantly poor performance”.

The choice sector, where members make an active decision to invest and have a wide range of investment options, is now expected to go through the same process of product closures and fee reductions as the MySuper sector after publication of its first heatmap in 2019.

Since then, 22 MySuper products, comprising 1.3 million member accounts and $41.8bn in member benefits, have closed, with three of them failing the new “Your Future, Your Super” performance test this year.

The Australian Prudential Regulation Authority’s review of superannuation member outcomes, released on Thursday, also revealed that poorly performed choice products were concentrated in the hands of eight trustees.

Of the eight, Christian Super, EISS and Australian Catholic Super had a MySuper product that failed the performance test as well.

In aggregate, the two heatmaps cover about 60 per cent of member benefits in the $3.4 trillion, APRA-regulated super sector. The inaugural choice heat­map focuses on multi-sector investment options in open, accumulation products, excluding platforms, representing 40 per cent of total member benefits – about $394bn – in the choice ­segment.

APRA executive board member Margaret Cole said the regulator would now intensify its supervision on the trustees of products delivering substandard member outcomes, with the new choice heatmap expected to have a similar impact to the MySuper exercise.

“With a legal duty to act in their members’ best financial interests, all trustees should now be scrutinising the heatmap findings to assess the outcomes they are delivering members, better understand any drivers of poor performance and then taking prompt action to address areas of concern,” Ms Cole said.

“If they are unable or unwilling to do so, they need seriously to reconsider whether their members would be better served with their money elsewhere.”

 

Superannuation members also deserved to have confidence that their retirement savings were being well looked after, regardless of what type of fund or product their money was invested in.

“Although there have been benefits generated for members from industry consolidation and reductions in fees in recent years, these heatmaps show there remains considerable room for ­improvement in member outcomes,” she said.

“In particular, a sizeable proportion of the choice sector has been exposed for delivering poor outcomes, especially considering these products generally charge higher fees than their MySuper equivalents.”

The key findings from the latest refresh of the MySuper heatmap were that 45 per cent of products, or 31 of 69, delivered returns below APRA’s heatmap benchmarks.

Investment returns were found to be the main driver of underperformance and while fees and costs were falling, there was still “considerable scope” for more reductions.

The heatmap incorporated 75 MySuper products covering 14.2 million member accounts and $853bn in member benefits.

The first annual Your Future, Your Super performance test for MySuper products was conducted in August, consisting of an assessment of investment performance and administration fees.

The test found that 13 MySuper products failed, comprising one million member accounts and $56bn in benefits.

A further seven default products only “marginally passed” the performance test, including $67bn industry fund Rest Super, which has 1.8 million members.

Most of Rest’s members are in the default product.

APRA said it expected trustees to improve the performance of all underperforming products “in a timely manner” to protect all members. “This is particularly the case where the product has failed consecutive performance tests and becomes closed to new members, which may result in further sustainability challenges for the trustee,” the regulator said.

APRA said the impact of staying in a poorly performed superannuation fund was significant.”

A Stronger And Cleaner Economy, Powered By Super

3 November 2021

JIM CHALMERS MP SHADOW TREASURER MEMBER FOR RANKIN

ADDRESS TO THE ACTU VIRTUAL SUPER TRUSTEES FORUM

It’s always a pleasure to be invited to address this Trustees Forum, something I’ve done most years now I think since about 2015. I’m grateful for that and for the opportunity to work closely with you, and for your work with Stephen Jones and our economic team.

Today I want to talk about climate change. But this gathering being so close to the election also gives us a good opportunity to first take stock of where we’ve been more broadly, and where we’re headed. The story of our economy and our super sector are so deeply intertwined over the last decade or so and will be even more so into the future.

Even though super played such an integral role in helping see Australia through the Global Financial Crisis, the Liberals upon coming to government froze the Super Guarantee.

When that freeze was followed by weaker wages growth, and when Australian GDP growth over the past eight years was the most tepid since the 1930s, driven in part by weak investment, the Liberals have still spent much of their time in office attacking super.

Last year, during our first recession in 30 years, they came after super with an early access scheme that bled $36 billion from super balances. And they had a good, long look at another freeze to the SG as well. My point is that at every juncture, the answer to every question, every challenge presented to this government in the economy, has been to blame and attack and diminish super.

This is partly out of envy at Labor’s creation, partly because it’s a partnership model bringing workers, unions and business together, but mostly out of blind, ideological recklessness. What makes this especially dangerous is that we need to get everything right if we are to avoid the future painted by the Treasury’s Intergenerational Report – which forecasts an economy smaller, slower, older, more stagnant over the next forty years than the last forty.

The Next Election is a Referendum on Super So that’s the context. I want to pay tribute to all of you, Scott Connolly and the ACTU, funds and peak groups – everyone who has mostly held these attacks at bay. Securing the legislated increases to the super guarantee this year was a fight we shouldn’t have had to have, but a win worth celebrating. We have won more battles than we’ve lost. And occasionally, even, a policy win – like the legislation introduced last week to remove the $450 minimum threshold for the super guarantee, which we have long supported and took to the last election as policy.

We thank you for championing this policy to protect and support those who would likely suffer the most from the falling living standards that have become a consequence of this Government’s failings – especially when it comes to low-paid working women. But you and I know, we’ve been around long enough to understand, that any victory is just another stay of execution. There’s always another attack just around the corner.

That’s why this next election is about super. It’s a referendum on whether super should be central, or sidelined. Built up or torn down. Because retirement incomes are never safe from a government in which the extremist anti-super tail wags this lightweight Treasurer. Not safe from the stagnant wages this government has said is a ‘deliberate design feature’ of its economic policies – remembering wage stagnation has a devastating impact on super balances as well.

So if the Coalition is re-elected: there’ll be more attacks on super; more attacks on wages; more attacks on Medicare; more attacks on living standards; and more attacks on the working families of middle Australia. That’s the risk attached to an eight-year-old government asking for another three years.

Super is a Solution, Not the Problem
Any objective observer knows super has been our big advantage; our economy’s saving grace. During the GFC, around 150 Australian businesses were able to secure almost $120 billion in new equity to support their growth – and almost half of that came from the super sector.

Despite the past 8 years of otherwise weak investment, super has remained a vital source of funding for our businesses and projects. In June this year, 13 per cent of APRA-regulated superannuation funds was allocated to property and infrastructure investments. That is more than $280 billion to support our fast-growing cities, suburbs and regions.
During COVID, super funds provided billions of dollars in recapitalisation and critical business credit and loans to Australian companies and private businesses, helping to absorb the economic shocks. This put downward pressure on the cost of capital for businesses, sandbagged the national economy, saving local jobs, and generated value for fund members.

Over the 12 months to June 2021, there was almost a 15 per cent increase in total superannuation assets. And in the future, Australian super assets are set to grow from $3.3 trillion today to around $34 trillion by 2060, which means from 157 per cent to 244 per cent of Australian GDP. Anyone who looks at the magnitude of this opportunity and wants to wind it back has got rocks in their head. Why would we undermine this source of business investment, dignity and
spending in retirement, and sustainable long-term growth? In 2020, Australia had the third largest pool of pension assets in the world as a proportion of GDP, ahead of the US and UK – and the fourth or fifth biggest overall.

Over the past 20 years, Australia has experienced the greatest asset growth of any pension market, growing by 11.3 per cent. Critical to this growth has been the compulsory and near-universal nature of the Super Guarantee. It means around a fifth of ASX capitalisation is currently owned by APRAregulated funds. So much more would be possible with a government which sees super at this magnitude as part of the solution to our economic challenges and not
the problem.

Super and Climate Change
Today I want to talk specifically about the opportunities for super in cleaner and cheaper energy and the clean economy more broadly. We know that you invest for the long-term and that means you have a fundamental role to play here. Your primary duty is to invest in your members’ best financial interests. And their best financial interests are served by investing in business and assets that will still be profitable thirty years from now.

This means you are acutely aware of the material financial risk that climate change poses today, and over the decades to come. The RBA, ASIC and APRA all share your views. We know climate change poses a risk to the entire financial system.
Just last month the RBA warned that international investors are increasingly adjusting their portfolios in response to climate risks and that Australia risks facing increasingly higher costs in relation to emissionsintensive activities. So we have no more time to waste.

It’s pleasing to see super playing a role in climate action, particularly the industry funds. We welcome every investment in renewable projects from super, as a much-needed source of capital. We have super funds to thank for investment in WA’s largest operational windfarm, in Melbourne Airport’s recently completed onsite solar farm, and in Ausgrid’s community battery project.

More Transparency on Targets and Plans
We also know that behind the scenes, super funds have had a strong record of engaging with the companies they invest in to ensure greater transparency and accountability.

You’re making a difference. The Australian Council of Superannuation Investors has played a leading role in highlighting which companies have committed to net zero emissions and have established targets and plans to get them there. This year, the number of net-zero commitments more than tripled and now almost half of the ASX 200 has set emissions-reduction targets. This is being driven because investors, particularly the industry super sector, are demanding it. In April 2020, IFM supported shareholder resolutions that Santos and Woodside, two of Australia’s largest oil and gas producers, set short, medium and long-term targets in line with the Paris Agreement. At the end of last year, Santos announced new emissions targets, to reduce their emissions by 26-30 per cent by 2030, and to net-zero by 2040.

But despite your best efforts, we know that there’s only so much that you can do in relation to climate risk disclosure when the existing reporting framework is insufficient, inconsistent and inadequate. We agree that regulators and government should provide clearer guidance on this and what companies should be reporting – and we’ll have more to say about it. Like the RBA, we’d like to see disclosures that are usable, credible and comparable, so that there is a baseline, all around the world, that we can measure against. This will help investors make informed decisions.

Last night, the RBA’s Guy Debelle, who has been leading a lot of this work, explained that the Task Force of Climate Related Financial Disclosures (TCFDs) has got a much more detailed, usable, updated guide to disclosure that is going to be the released as part of COP26. This is likely to emerge as the standard that most countries and companies start adopting – and that’s a good thing.

Policy Uncertainty is a Handbrake on Investment
But a lack of consistent and transparent information is only part of the story. Eight years of Coalition policy uncertainty has been a handbrake on super investment in cleaner and cheaper energy. Funds cannot invest with confidence when a government cycles through 22 different plans in 8 years – the last one little more than a pamphlet. Policy uncertainty pushes up the price of finance. That pushes up the price of new projects and technology. It slows the transition. It also means super funds are increasingly needing to look offshore. So we desperately need policy stability, and clear and ambitious targets, which create certainty for super investments to follow.

Economic modelling for IGCC has shown that Australia would create $63 billion in fresh investment opportunities over the next five years by strengthening climate targets and policies in line with reaching net zero emissions by mid-century. And stronger 2030 policies can unlock $131 billion investment in clean industries and new jobs by the end of the decade.
The biggest impediment to tens of billions of dollars of investment in cleaner and cheaper energy is a Prime Minister who can’t get his head around the opportunities here and whose heart isn’t in it. So many missed opportunities to create real jobs, and real investment, in regional communities and economies. Action and leadership that we know won’t cost jobs but will create them. We know the market is there for renewable energy investments in Australia because it has been growing all around the world. And yet, we’ve been bucking the global trend. Australia is losing another race it should be winning.

S&P Global analysis indicates a passive investment in the ASX200 exposes investors to around twice the carbon exposure per dollar invested than in other major markets. Large investment funds report that if they invest in Australia at all, they
spend around 2-3 times as much capital in projects in the EU, USA and Asia than they do on Australian projects.

But these are the numbers that really stood out for me:
A recent survey of Australian investors managing $1.3 trillion found that 70 per cent of them highlighted policy uncertainty as a key barrier to investment, up from 40 per cent last year. This month, HESTA CEO Debby Blakely said, ‘while we want to invest more here, for every $1 we have invested in Australian renewables, we have $3 committed to equivalent assets overseas. The assets are in countries that provide stable, predictable policy settings, which have
given us the confidence to make long-term investments’.

The BCA also identified “policy certainty” as a key factor currently missing in Australia’s energy investment landscape.
This is a devastating vote of no confidence in Scott Morrison and Josh Frydenberg and the wasted decade of missed opportunities the Coalition has presided over.

Super Can Be Central
I know you all understand this. You know that more investment in cleaner and cheaper energy means more opportunities for more people in more parts of Australia. We need a government that understands this too. That won’t be a fourth term Coalition government led by Scott Morrison and Barnaby Joyce. A first term Albanese government would understand and unlock these opportunities.

We know super belongs at the very centre of the recovery. And that this is a key part to ensuring our economy is stronger and our energy cheaper and cleaner after COVID than it was before.

Frydenberg, Hume must force all superannuation funds to disclose their unlisted property, other assets

The Australian

1 November 2021

Robert Gottliebsen – Business Columnist

As industry and retail superannuation funds plan to increase their investment in unlisted securities, APRA and ASIC have disclosed dangerous gaps in the valuation processes of some of the funds and the willingness of some executives, trustees and their spouses to engage in a form of insider trading to take advantage of those bad valuation practices. It is the long term fund members who have been hit.

That means Treasurer Josh Frydenberg and Superannuation Minister Jane Hume must step in and look after members by forcing all funds to disclose their unlisted property and other unlisted assets; the valuation of each of these investments; the regularity of investment review: and in the case of income producing property the yield that is used to calculate the value. This is an absolute minimum. There is a good case to follow the US and demand details of all transactions. While most members will not read the disclosures, they will enable analysts and journalists to undertake the much needed task of monitoring fund valuations.

The existing legislation appears to already require the funds to disclose unlisted holdings and their values but the regulators have not enforced it. Clear regulation is urgently required and later changes need to be made to the legislation to stop the director/trustee rorts — albeit that a only small minority have abused their power and taken advantage of the doubt as to whether insider trading laws apply to superannuation funds when trustees, directors and their spouses switch their fund holdings to under valued unlisted assets.

For more than a year the ALP and some superannuation fund executives have been campaigning to prevent their members from being told the values of the properties they own and how those values were arrived at.

Among the superannuation executives who have been campaigning are people I respect and I am sure they had no knowledge of the dreadful practices that have now been revealed by APRA and ASIC.

The ALP appears to have been motivated by the cash it receives from unions.

Whether it be the superannuation fund executives or the ALP, the arguments they used to prevent disclosure were dubious at best.

In unlisted property trusts it is common not only for the individual property valuations to be revealed but also the yield which is used to calculate those property values. Naturally these values change especially in times when there are sharp fluctuations in interest rates as we have seen recently.

Superannuation funds every day are paying out pensions and lump sums to retiring people and at the same time taking in funds. It is totally unfair not to have up to date valuations on all unlisted assets — especially when there are major changes — because without them either the buyer or the seller is in danger of being disadvantaged.

Some of the arguments used to urge the government not to do the right thing by superannuation members by not disclosing valuations make no sense at all. For example it was even suggested that disclosure would impact the ability of a fund sell an asset. Buyers of a particular property will want to know the rental income and will make their own judgment on recent sales and yields in the sector. Book values of the non listed assets in a fund change regularly so the way the property is listed in the books is almost an irrelevancy in the sale process.

Meanwhile, the findings of APRA and ASIC are sickening given this is a $3 trillion industry where members trust their directors and trustees to undertake proper valuation processes and not to turn bad valuation methods to their own benefit.

APRA found few big superannuation funds had “robust, pre-existing frameworks for implementing, monitoring and reverting to regular valuation approaches following out-of-cycle revaluation adjustments” — ie they did not quickly adjust unlisted asset values when there was a major rise or fall.

Among the APRA discoveries were: the absence of formalised monitoring processes for valuation adjustments; no framework for the alteration of valuation adjustments; inconsistent valuations for different classes of unlisted assets; and board and management time dedicated to devising processes, rather than considering and challenging valuations

This is elementary stuff.

Then ASIC discovered how some trustees, directors and their spouses abuse the consequences of this bad management.

An ASIC surveillance about personal investment switching by directors and senior executives of superannuation trustees has identified “concerns with trustees management of conflicts of interest”.

ASIC looked at a sample of 23 trustees (including trustees of industry and retail funds) and focused on conduct during the time of increased market volatility arising from the Covid-19 pandemic.

They often found “clear failure to identify investment switching as a source of potential conflict, resulting in a lack of restrictive measures and oversight to adequately counter the risk”.

“This is very concerning given the level of sophistication and governance required of trustees when managing millions of dollars in assets on behalf of fund members.

“The superannuation funds had failed to identify investment switching as a risk and there was a disparity in board level engagement, lack of restrictive measures and in adequate oversight of investment switching and lack of oversight of related parties”

Frydenberg and Hume have done a wonderful job cleaning up the superannuation industry to the benefit of members but there is more work to be done.

Super test failures ‘looking to merge’, says APRA

The Australian

28 October 2021

Patrick Commins – Economics Correspondent

Five of the 13 super funds that failed this year’s inaugural ­investment performance test are actively looking to merge with other funds, APRA has said.

The Australian Prudential Regulation Authority chairman Wayne Byres told a Senate estimates committee hearing on Thursday that “the trustees of those 13 products now face an important choice: they can ­urgently make the improvements needed to ensure they pass next year’s test or start planning to transfer their members to a fund that can deliver better outcomes for their members”.

APRA figures from August 31 show there were one million members in the 13 super funds that failed the performance test, with assets totalling $56bn.

The trustees of the failed products included some big names, including Colonial First State and Asgard, alongside ­others such as Maritime Super and Christian Super.

The 80 MySuper products that were subject to the test represented 134 million members, with a combined $844bn in ­assets under management.

Recently appointed APRA member Margaret Cole said the actions the regulator was taking in regards to funds that flunked the test were “intensified supervisory activity and a great deal of contact with those trustees of those failed funds”.

Ms Cole said APRA had ­already received or expected to receive shortly “contingency plans” that would show how the trustees planned to improve their investment performance and pass next year’s test.

The Your Future, Your Super reforms, which kicked off on July 1, require APRA to conduct an annual performance test for ­MySuper products, which are also ranked via an online tool ­offered by the Australian Taxation Office.

From July 1, 2017, all member accounts in default investment options have been required to be invested in MySuper products, which are now subject to annual performance tests and ranked online. A fund that fails the performance test in two consecutive years is not able to take on new members, and will not be able to reopen to new members until their performance improves.

Ms Cole said the “biggest lever” trustees could pull to ­improve their performance would be to reduce fees – a key objective of the YFYS legislation.

Superannuation Minister Jane Hume noted that since the Morrison government introduced the reforms, 37 of 81 MySuper funds had cut their fees.

Ms Cole said “where it ­appears there will be difficulty passing next year’s test”, the regulator was pushing trustees to make an “appropriate” merger.

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