The Australian

3 February 2018

John Rawling

Over summer the big four banks quietly cut interest rates for online savings accounts, continuing a trend to squeeze customers. But spare a thought for age pensioners, who have been experiencing a similar squeeze for nearly six years.

For many years banks have offered age pensioners specialised bank accounts under various names: ANZ Pensioner Advantage account, Commonwealth’s Pensioner Security account, NAB’s Retirement account and Westpac’s 55+ and Retiring account.

Alongside the rates earned by these bank accounts is another rate — a deeming rate — which is set by the Minister for Social Services. Deeming rates are the key component of the income test for the pension.

Deeming rates assume that financial investments (including bank accounts, listed securities and managed funds) earn a certain amount of income regardless of the income they actually earn.

If a deemed rate is higher than an actual rate, the pensioner loses out.

For instance, a $200,000 deposit in the Commonwealth Bank’s Pensioner Security account will earn actual interest of $2965 per year. But deemed income is $5747. The end result in this instance is that it will reduce a pension by $26.52 a fortnight.

According to Centrelink, deeming is a simple and fair way to assess income from financial assets.

“By treating all financial investments in the same way the deeming rules encourage people to choose investments on their merit rather than on the effect the investment income may have on the person’s pension entitlement,” a Centrelink spokesman says.

Banks have offered specific accounts for pensioners/seniors since the deeming regime was adopted by Centrelink in 1996. They were marketed as “deeming accounts” and paid actual interest which closely matched the Centrelink deeming rates. Deeming rates were set at 5 per cent for the first $30,000 for single pensioners and $50,000 for couples. Higher amounts earned 7 per cent.

By 2010, in the wash-up of the global financial crisis, deeming rates had fallen to 3 per cent and 4.5 per cent, respectively — still at or below the cash rate. They remained there for three years, until March 2013.

When the official cash rate fell from 4.5 per cent to 2.5 per cent over a couple of years, the banks followed suit.

By December 2013 — as the official cash rate fell to below 3 per cent — the disparity between the cash rate and the deemed rate had become so great that ASIC stepped in. To avoid action for misleading and deceptive advertising, the banks were forced to remove references to deeming and rename the accounts.

July 2012, six years ago, marked the first time that the official cash rate was lower than the higher deeming rate. Pensioners with large deposits started losing out.

August 2016 was the first time the official cash rate, at today’s rate of 1.5 per cent, fell below the lower deeming rate. Suddenly all pensioners were affected.

Currently the deeming rates are set at 1.75 per cent for the first $50,200 for single pensioners and $83,400 for couples, with higher amounts assumed to earn 3.25 per cent.

There has been no comment from Centrelink or the Minister for Social Services as to why the large disparity between deeming rates and official interest rates has been allowed to occur.

One can only speculate how much pensioners subject to the income test have lost since 2012.

These days, finding a savings account with a major bank that pays an interest rate anywhere near the official deeming rates is close to impossible.

For pensioners not to lose out, either interest rates will have to increase, or the minister will have to lower the deeming rates, or both.

John Rawling is an aged-care consultant at Joseph Palmer and Sons

Centre for Independent Studies

1 February 2018

Robert Carling

With the campaign to increase tax on superannuation in full swing two years ago, Kelly O’Dwyer (Assistant Treasurer at the time) let it be known that superannuation tax concessions were “a gift that the government should only provide when it makes sense”.

It has long been obvious there was a belief alive in some corners of Canberra that government has first claim on our income and the role of tax policy is to determine the residual available for private use. But it still came as something of a shock that this interventionist way of viewing the relationship between government and the people had spread so far.

It’s at this time of the year the government reveals the extent of its generosity, in the annual Tax Expenditures Statement (this year quietly released after the close of business on the day before Australia Day).

The government’s ‘gifts’ are all there to be seen in the TES, each one with its own price tag. Not taxing capital gains on the family home the same as other assets: $33 billion a year, thank you very much. Discounting capital gains by half: another $51 billion. Not taxing concessional superannuation contributions at full rates: another $17 billion. Not taxing superannuation fund earnings at full rates: another $19 billion. And so on it goes.

The problem with all this is that the estimates are extremely rubbery, and in any case they all depend on the benchmark against which the ‘gifts’ are measured. Taken to extremes, the notion of ‘tax expenditure’ could be used to claim that not taxing all income at the top marginal rate is a ‘gift’, or for that matter so is not taxing everything at 100%.

Thankfully the TES does not go that far. The benchmark used by Treasury to make the estimates is the so-called comprehensive income tax benchmark, under which the standard income tax scale is applied to any form of income.

But what is included in ‘income’ under this approach is still a matter of judgement. They don’t include in the benchmark the imputed rental income of owner-occupied housing, which a purist would include. They do include realised capital gains on such housing — and the purist would go further and include unrealised gains as well.

It’s not clear that capital gains should be included at all. And it’s not clear that taxes on saving through superannuation should be benchmarked against a comprehensive income tax on such saving.

In this year’s TES, the Treasury makes a concession to that viewpoint by including alternative estimates of tax expenditures on superannuation against an expenditure (or ‘consumption’) tax benchmark, and the result is a startling $28.7 billion a year lower.

Treasury concedes “there are reasonable arguments for both the comprehensive income tax benchmark and the expenditure tax benchmark” and adds that “caution should be exercised when drawing conclusions on the size of the superannuation tax expenditures.”

This is a warning to those who confidently state year after year, as if reciting an incontrovertible fact, that superannuation tax concessions are costing the budget more than

$30 billion. The Henry tax review went further than the TES warning, stating baldly that “comprehensive income taxation, under which all savings income is taxed in the same way as labour income, is not an appropriate policy goal or benchmark.”

The benchmark isn’t the only problem with tax expenditure estimates, and the Treasury has sprayed words of warning all over the document. The problem is that these warnings have been judiciously ignored by users in the past and are likely to be again this year.

The TES is like manna from heaven for those on a mission to increase revenue to fund more government spending or to promote ‘fairness’ by taking more from ‘the rich’. To such users of the TES it is nothing but a revenue-raising policy menu — and never mind the defects, judgements and ambiguities in its construction.

The huge amounts of tax expenditures reported for superannuation concessions — against the questionable comprehensive income tax benchmark — were instrumental in the campaign to reduce such concessions.

If the TES reveals distortions, rorts or concessions that have no good reason for being, they should go (in favour of lower tax rates for all, not more spending). But on closer inspection the TES isn’t the Aladdin’s cave it is often thought to be. Many tax expenditures are there for good reason and do not deserve to be labelled as rorts or distortions.

Robert Carling is a Senior Fellow at the Centre for Independent Studies

(emphasis added by Save Our Super)

The Australian

30 January 2018

Tony Kaye

Almost 90,000 individuals and couples around Australia who previously received a part age pension payment completely lost their entitlements in 2017 as a ­result of the federal government’s changes to the pension assets test rules.

In addition, hundreds of thousands of individuals and couples who were previously receiving a full pension have had their payments reduced. The revised pension assets test rules also mean many Australians who had based their ­retirement income stream on receiving a part age pension in the future should seek out professional advice urgently to re-evaluate their financial position.

The Department of Social Services has confirmed about 86,600 part-rate age pensioners had their pension cancelled as a result of the assets test changes that came into effect on January 1, 2017. And, as we head into 2018, more retiring Australians will likely miss out on receiving any level of age pension.

The new limits on the amount of assets outside of a family home that could be held by couples or individuals before their pension rate was reduced was introduced last year as part of a wider plan by ­Financial Services Minister Kelly O’Dwyer to reform the pension and superannuation system. The amount of pension received is now reduced by $3 per fortnight for every $1000 over the new limits under the pension taper rate.

Using the latest official government data, it is clear that between the end of December 2016 and the end of June the number of recipients receiving a part age pension under the assets test fell from 486,031 to 321,106, a variation of just over 147,000. The DSS has claimed only part of that difference was due to the actual changes in the assets test, and that no full-rate age pensioners have had their pension cancelled due to the ­assets test changes.

However, between December 2016 and mid-2017, the total number of Australians receiving an age pension dropped from 2.57 million to 2.49 million. The number of couples receiving a full or part pension fell by about 61,000, from 1.43 million to 1.37 million, while the number of singles slipped from 1.13 million to 1.12 million.

How it works now

In terms of assessing the age pension under the assets test, the DSS data shows about 1.18 million recipients are couples owning a home. A further 660,000 are singles owning a home. These cohorts tend to have the highest value level of ­assets outside of their homes.

The pension assets test does not apply to the family home itself, but it does apply to its contents and any other assets owned, including property, vehicles, caravans, boats, superannuation holdings and funds in bank ­accounts.

Average superannuation balances at retirement already put many Australians close to or over the new asset test thresholds. But one of the biggest problems for those in this position is that having higher superannuation retirement savings may actually generate less tax-free income than those relying solely on the age pension. In other words, having more ­assets can potentially be a big disadvantage.

On current age pension rates, a single person receives $23,254.40 a year. A couple receives $17,529.20 each. A couple with $850,000 of personal assets outside their home is not eligible for any age pension, but based on a 4 per cent annual return they will need that amount saved to generate the same level of tax-free income as an individual or couple receiving the full age pension.

As such, the changes to the assets test could deter some individuals and couples from putting money into their superannuation, as even a couple can only hold $375,000 in retirement savings collectively ($175,000 each) before their age pension entitlement begins to fall. The alternative is to ­direct more capital into the principal place of residence, which does not count towards the assets test.

Data released last month by the Association of Superannuation Funds of Australia shows a retired single person needs $43,694 a year and a couple needs $60,063 to be considered as having a comfortable standard of living. To achieve that sort of income, ASFA says singles need $545,000 in their super and couples need $640,000. But having those levels of superannuation could put many singles and couples out of contention for receiving the age pension, depending on whether they own a home.

The assets test changes have led to some people moving around their financial assets so they can receive the age pension, including directing more money into their tax-exempt family home. There are various strategies to reduce your assets, but the secret is to maintain your standard of living using current income sources.

In effect, while low-income earners will get the full age pension as a matter of course, and high-income earners have too many assets to be entitled to any pension anyway, those in the middle income bands have been most affected by the asset test rules.

Tony Kaye is the editor of Eureka Report, which is owned by financial services group InvestSMART.

www.investsmart.com.au

The Australian

10 January 2018

Glenda Korporaal

But the longer-term financial impact on those affected is now becoming more apparent.

The Self-Managed Superannuation Fund Association threw a spotlight on the issue yesterday.

In a statement, chief executive John Maroney said it was now apparent that the changes to the means test taper rates and thresholds have had “significantly adverse and presumably unintended consequences”.

He said the steeper taper rate that took effect from January 1 last year is now actively discouraging middle-income wage earners from saving to be self-sufficient in retirement.

Maroney argues that the changes have created a “black hole” for people directly affected by the changes that makes them worse off in terms of income — encouraging them to spend up (or cut back on their savings) to reduce their assets to qualify for the pension. He cites the example of a home-owning couple who have a superannuation balance of between $500,000 and $800,000.

The Australian

22 December 2017

Robert Gottliebsen – Business columnist

One of the most important issues of 2018 is going to the management and behaviour of our non self-managed superannuation funds.

And there is no better time to get it right than when the share market is rising and there are good news stories to tell.

As things now stand what is happening is a national disgrace. So let’s put four items on the agenda for superannuation change in the year ahead.

• Total disclosure of all fees paid to employers and unions in the case of industry funds and all fees paid to banks, AMP and other retail fund owners, plus all other management fees
• An end to the current racket that stops people choosing funds and being ripped off with multiple fees as a
• The unravelling of the “Great Investment Fee Mystery” where it looks like some of the wealthiest investment managers and advisers in Sydney are donating their services to superannuation for no That can’t be right. This smells of yet another bank scandal for the banking royal commission to look at.
• At least make a start on getting investment managers to think about the long-term interests of members rather than short-term profit forecasts. I will elaborate on this theme during 2018 because it’s vital to members of non-self managed funds and the nation.
• An end to the racket where those who chose funds see their money held by the so-called “manager of choice” for one or two months and then passed onto the fund of This certainly happens in the retail area and may happen in industry funds. The money should go straight from the employer to the fund of choice. It’s just another racket that reflects a sector that is lazy in protecting members’ interests.

During 2017 I wrote many commentaries demanding that industry superannuation funds disclose all direct and indirect payments to employer groups and unions. It’s important that fees disclosed cover situations where money is drafted into low cost so-called “my super” funds and where members make a choice of fund. If I make a choice I need to know the fees, including owner fees, being charged on my money. To me that’s elementary and I can’t believe we are debating this.

Somehow under the proposed and ill-fated legislation the government required fee disclosures on the so-called “my super” funds, but nowhere nearer the same level of disclosure in the “choice funds”. It made no sense.

Now it so happens that 80 per cent of industry funds were based on the “my super” schemes (where there must be backer disclosure) whereas in the retail area it was the reverse— roughly 80 per cent were “choice” funds (no disclosure) and 20 per cent “my super”.

The industry funds tell me that they are happy for full disclosure of all direct and indirect payments to their backer, but it must apply industry-wide to both the “my super” and “choice” sectors, not just the sector where they dominate. And they are absolutely right. The minister, APRA or the royal commission need to fix it. Frankly the retail funds and the industry funds should together volunteer full disclosure.

It so happens that overall costs of industry funds are much lower than in retail funds so full disclosure in the retail sector is very important.

But the industry sector has its own set of bad practices.

People, usually on low incomes, are forced or shepherded into different industry funds when they work for, say, a pub and a retailer. The low income earners with two or more funds are then slugged multiple fees. There must be an ability to chose your fund so that retail workers who have a fund from their work in the pub can easily stay with one fund. The industry funds are proposing a scheme that will help reduce this fee racket and that’s good but fund choice is vital.

Now to the “Great Investment Fee Mystery”.

What makes it such an enthralling saga is that by reputation the characters in our tale have magnificent houses and drive fast luxury cars. How do they get this money? Either the investment managers have family money, a generous banker lending them vast sums, or they are on a high income. Clearly I am jesting but it’s a joke with a serious twist.

In the superannuation figures required by APRA there is a column called “investment fees” and that’s where we should look for clues as to the source of this well-displayed wealth.

In the industry funds there are some very large disclosed sums. For example, Australian Super public offer funds paid $418 million in investment expenses but to be fair this represented only 0.4 per cent of their assets. The health employees paid $101 million in investment fees but the ratio was only 0.28 per cent. All the funds have disclosed a figure and while there are percentage charges above and below, most fall into those brackets.

The point is that there is disclosure.

Now we go to the public offer retail funds. It looks like there are roughly about 80 retail funds. But about half of them have what looks like the deal of a lifetime because they pay no or token investment fees. Among those who do not pay investment fees are the heavy hitters like AMP, Commonwealth Bank’s Colonial, and NAB’s MLC, while Macquarie’s costs are 0.03 per cent of assets.

And so where do those fast cars and luxury houses come from?

Clearly there are side deals and somehow, some way, in parts of the retail sector investment charges are contracted out to others and not disclosed. I am sure the industry funds contract out as well but at least on the surface it would seem they and many of the retail funds include those costs in investment fees. But let’s get it all out in the open.

Remember this is not employer body, union or bank money — we are looking at funds owned by ordinary Australians who are members of non self-managed funds. Self-managed funds know exactly what they pay and APRA should want the same privilege for non self-managed funds. APRA needs to stop turning a blind eye to those funds showing no or token investment fees.

The head of the bank industry body, Anna Bligh, proudly has set out new rules for bank conduct. That’s good. But let’s start by disclosing what is really being paid in investment expenses.

When people say the cost is “nil” when it is clearly not “nil”, it usually means there is something to hide. Let’s get it out into the open.

Have a wonderful Christmas and see you in the New Year.

Robert Gottliebsen has spent more than 30 years writing and commentating about business and investment in Australia. He has won the Walkley award and Australian Journalist of the Year Award, two of journalism’s highest honours. He is an economic writer at The Australian, and he appears on television and various radio stations.

The Australian

16 December 2017

James Kirby

Looking out 12 months is never easy, but most investors would agree conditions are as promising as we have seen them in many years. As an active investor the summer break is a good time to review what you have been doing in the last 12 months and, importantly, make some key decisions for the year ahead.

Here’s my checklist for 2018.

Explore borrowing at low rates

Official rates remain at 1.5 per cent. In order to reach levels that central bankers regard as “normal” they would have to double to 3 per cent. In reality banks have tried everything to push the actual rates borrowers pay in the market higher. Home mortgage rates are close to 4 per cent or higher if you are an investor or interested in interest-only loans. Nonetheless, this extended era of low rates means that many investors can remain comfortable with borrowing to leverage their performance in any investment class, and that includes shares. (Remember negative gearing is not just for property).

ETFs remain market darlings

With the majority of brokers forecasting strongly positive returns on the ASX for 2018, it is a year which may very well suit index funds, or exchange traded funds. Brokers are looking at stock price increases across the market of 9 per cent with an additional 4 per cent from dividends. If the market is going to offer on average 13 per cent or anything near it, then there is a very compelling argument for ETFs, which simply reflect the performance of the index. Certainly, there are flaws in non-discerning approach of  ETFs, but for the year ahead they would seem to answer a lot of questions.

Don’t miss a mining a rebound

It’s been a while since the miners were front and centre of the investment scene — last year the mining index outpaced the wider market: The mining index returned close to 17 per cent against around 10 per cent for the wider market. What’s more, there is every reason to believe the miners can do it again in 2018 with synchronised 3 per cent-plus global growth expected to push all resources higher.

Under this scenario household names such BHP and Rio are perfectly placed. On top of that there is the dramatic requirements that EVs (electric cars) are expected to place on selected resources: nickel, lithium, cobalt and graphite. Junior miners that supply into the EV battery market such as Syrah, Orocobre, Iluka and Galaxy are expected to benefit as electric cars move towards representing one in five cars by 2020.

Stick with residential property

Is it a soft patch or the long-anticipated disaster gloom merchants would have us believe? It looks for all the world like a soft patch engineered by the macroprudential restrictions regulators imposed on the banks this year. Yes, house prices are expected to be flat in 2018, but that is not a signal to sell property, rather it is a signal to hold on.

There is undoubtedly weakness in Sydney market and risks of further weakening in Melbourne. At the same time there are convincing signs that Perth will have a better year in 2018 than it did in 2017. There will be problems in inner city apartment projects and second-grade properties across all cities, particularly Brisbane. But with low interest rates and unemployment levels at less than 5.5 per cent, it does not represent a threat to mortgage servicing patterns … that’s the heart of the housing market.

Know your retirement sweet spot

Earlier this year the government announced major changes to superannuation which included new contribution caps coupled with subtle but severe restrictions on pension access. These changes have changed the dynamics of retirement savings. The system is absurd and now so poorly structured that you can quite literally get more income by saving less. Put simply in terms of annual income don’t be in the middle zone! Wealth writer James Gerrard has estimated that the annual income of a couple who own their home with $400,000 get an income $52,395 a year thanks to Centrelink, a couple in the same position with $800,000 get $42,251.

Yes, of course it is better to have your own savings, but it is surely galling to know you can have a higher income if you save less.

Find your non-correlated assets

This is a bull market — know it when you see it. US and Australian shares are expected to return 10 per cent-plus in the year ahead. Tech stocks are selling at remarkable prices and then there is the unprecedented excitement around bitcoin. Sooner or later we will get a correction and eventually we will get a sharemarket crash. Non-correlated assets are assets that are expected to “perform well” when this happens. The last time the markets crashed in 2008 we found out the hard way that many of the newer breed non- correlated assets did not work — this would include hedge funds and a variety of products which are exposed to weakness in securities markets. There are two enduring non-correlated assets which have proved themselves in all weather: cash and gold.

• Cash: In Australia cash deposits have the exceptional advantage that they are guaranteed by the government at up to $250,000 (per person, per bank). Moreover, cash rates though historically low are inching
• Gold now has a rival in bitcoin but it would be a brave investor who would depend on cryptocurrency when the RBA deputy governor Guy Debelle just this week blasted the cryptocurrency craze warning it was “a speculative mania”.

Gold — the bullion not gold shares — proved to be a very effective non-correlated asset after the GFC and it will no doubt do it again in the future.

(Emphasis added by Save Our Super)

Joseph Cheung (jcheung@dbalawyers.com.au), Lawyer and Bryce Figot (bfigot@dbalawyers.com.au), Special Counsel, DBA Lawyers 

Payments above the account-based pension (‘ABP’) minimum annual payment have the potential to become a trap. The June 2017 SMSF Benchmark Report by Class Super states that ‘the average SMSF pensioner withdraws about $74,000 annually on their pension over a series of 12 transactions and overdraws $24,000 above their minimum’. This means that the average pensioner is withdrawing more than 32% above their relevant ABP minimum and could miss out on significant opportunities unless timely action is undertaken! This article summarises the trap and examines the main reasons to prospectively document a strategy as soon as possible.

What is the trap?

For pensioners who receive payments above the ABP minimum for their ABP(s), the capital supporting the ABP(s) is reduced by the amount of pension payment(s). However, there is no corresponding debit to the pensioner’s transfer balance account (‘TBA’)!

Where the pensioner had ‘maxed out’ their transfer balance cap, they cannot add any further capital to start a new pension that is in the retirement phase (ie, a pension that will obtain a pension exemption). Therefore, drawing more than the minimum payment will exhaust the capital supporting the ABP(s) significantly faster than would otherwise be the case. Where the pensioner had not ‘maxed out’ their transfer balance cap, there will be limited capacity to add further capital to commence a new ABP.

What is a strategy to avoid this trap?

DBA Lawyers understands that many advisers in the SMSF industry have been contemplating various strategies to avoid this trap. A common theme in the strategies involves partially commuting some or all of the amounts above the relevant ABP minimum(s). The following is an example of one of the strategies:

• Pay all amounts above the relevant ABP minimum(s) as a lump sum payment from the pensioner’s accumulation interest.
• Where there is no accumulation superannuation interest or the accumulation superannuation interest is insufficient to pay the amounts in excess of the relevant minimum ABP amount(s), these excess amounts are to be paid as a partial commutation of the relevant ABP.

What are the main reasons to prospectively documenting a strategy as soon as possible?

Compliance with the Australian Taxation Office’s (ATO’s) view

In relation to the partial commutation of pensions, the ATO‘s view (as expressed in SMSFD 2013/2 and TR 2013/5) is that the pensioner must consciously exercise their right to exchange something less than their full entitlement to receive future pension payments for an entitlement to be paid a lump sum. Where no documentation exists either before or at the time of payment, it is hard to prove that the pensioner consciously exercised their right. The ATO could decide that there was no partial commutation and that the amount was just paid as a pension payment in excess of the relevant ABP minimum(s).

Similarly, where the payments are allocated and the strategy documented ‘after the fact’, the ATO might take the view that that the payments did not come from an accumulation superannuation interest as it could not be proven that this was the parties’ intention at the time of payment, and it was not a valid partial commutation. Accordingly, a conservative approach is to have relevant documentation completed and signed before the payment of the amounts in excess of the ABP minimum payment.

The onus of proof rests with the taxpayer. Also, the ATO may allege false and misleading disclosure and, in addition to winding back any tax benefit from the ‘fabrication’ of any documents that did not exist before the relevant commutation, may impose penalties of up to 75% plus the general interest charge.

Achieving administrative efficiency and certainty under ATO reporting requirements — Transfer Balance Account Report (‘TBAR’)  

The ATO new reporting regime associated with the transfer balance cap commenced on 28 September 2017 and applies from 1 October 2017. Broadly, the TBAR regime will involve a need to report on an events basis regarding events since 1 July 2017 that have an impact on the pensioner’s TBA. (TBAR also extends to reporting where further information is required to calculate a member’s total super balance or concessional contributions averaging amount from 1 July 2018.) For example, all ABP commutations will need to be reported. Reporting will be required whenever there are events that result in a debit or credit to the pensioner’s TBA. SMSFs will not be required to report until 1 July 2018 due to an administrative concession. However, it is best practice for SMSFs to start reporting from 1 October 2017.

The ATO’s rationale for the introduction of TBAR is to enhance visibility of each pensioner’s TBA. There will be time limits for reporting events. TBAR is relevant for strategies to avoid the trap described above. Amounts that are paid directly from a pensioner’s accumulation interest will not need to be reported. However, amounts that are paid as a partial commutation of the pensioner’s relevant pension will need to be reported.

To the extent that pensioners (and their advisers/SMSF trustees) are not aware of their TBA, the TBAR regime could exacerbate this trap. For example, a late lodgement penalty may be imposed by the ATO if a pensioner’s partial commutation in relation to the amount above the relevant ABP minimum is not reported on time.

The introduction of the TBAR regime is also likely to increase the administrative costs for SMSFs. If a strategy was not prospectively documented for all future payments above ABP minimums, the adviser/SMSF trustee may have to liaise with the pensioner prior to each payment regarding the treatment of any amount above ABP minimums. For example, they would have to decide on which pension account the payment is to come from, and whether the amount above the ABP minimum was to be treated as coming from the pensioner’s accumulation interest or as a partial commutation. After making this decision, the SMSF trustee would then have to document each decision. The more payments there are during the year that are in excess of the relevant ABP minimums, the greater the frequency of the attendances and liaising required. Where an adviser is assisting the pensioner with the TBAR reporting, the extra attendances and liaising may translate to increased costs for the SMSF. The pensioner may also feel burdened by the extra amount of time needed to liaise with the adviser.

Moreover, advisers need to ensure their advice and services comply with the Australian financial services licence (‘AFSL’) regime. Where a strategy was not prospectively documented for all future payments above ABP minimums, advisers without an AFSL would be at further risk of attending on multiple occasions a ‘restructure’ of the pensioner’s payments. We would generally recommend that pensioners be provided advice from a licensed adviser prior to the commencement or commutation of an ABP.

One way to achieve administrative efficiency is to prospectively document a detailed strategy for all future payments above ABP minimums. Less documents are involved provided that the strategy is applied consistently to all future pension payments. Less attendances are required from advisers — this should hopefully translate to reduced costs for the SMSF and more time and resources for advisers to perform other tasks. Prospectively documenting a strategy also adds certainty to the treatment of future payments. The adviser/SMSF trustee could then follow the documented strategy when reporting under the TBAR regime.

Conclusion

Unless SMSF pensioners take timely action and prospectively record a strategy for payments above ABP minimums, they may be at risk of falling into an inescapable trap. Naturally, developing a strategy to cover all future payments above ABP minimums is no easy task!

DBA Lawyers offers documentation to prospectively record a strategy for all future payments above ABP minimums for any pensioner who wishes to protect the capital supporting their ABP(s) from being exhausted beyond the relevant minimum pension amount. For more information, please visit http://www.dbalawyers.com.au/payments-abp-minimum-documentation/.

*        *        *

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

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

www.dbalawyers.com.au.

24 October 2017

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

Australian Financial Review

14 December 2017

Alice Uribe and Sally Patten

The Australian

3 December 2017

Judith Sloan – Contributing Economics Editor

This week in Sydney, the Association of Superannuation Funds of Australia held its national conference. There were nearly 2000 attendees, which tells you a lot.

There is no doubt that superannuation is one of the biggest gravy trains in Australia. With more than $2 trillion under management, the industry supports an army of fund managers, administrators, trustees, lawyers, accountants and executives.

It’s a truly beautiful industry, with guaranteed cashflows coming in like the tide courtesy of the superannuation guarantee charge, now set at 9.5 per cent of earnings. The industry is wont to slap itself on the back. Australia’s superannuation arrangement is among the best in the world, if not the best. Mind you, this assessment tends to be from the point of view of the providers rather than the beneficiaries. But what’s not to love about a privatised industry based on obligatory saving on the part of the vast majority of workers?

There is a lot of ex post rationalisation that goes on about superannuation in Australia, and there was plenty going on at the conference. The reality is that compulsory superannuation began in this country as a result of a high-level industrial relations stitch-up that had nothing to do with rational retirement incomes policy.

In exchange for forgoing a pay rise, workers were awarded 3 per cent of their pay in the form of superannuation. It had always stuck in the craw of then treasurer Paul Keating that only better-paid workers and public servants received the benefit of superannuation while lower-paid blue-collar workers received nothing. In the context of what was a relatively derisory Age Pension, it was not difficult to appreciate his concern. (The Age Pension is now much more generous.)

There was also some economic nonsense put out at the time that superannuation was a means of solving Australia’s saving problem. The Labor government even commissioned a report on the issue by economist Vince FitzGerald. It turned out that in the context of a floating exchange rate, the argument that there was a need for government policy to boost saving (to finance the current account deficit) evaporated. We don’t hear any more about the role of superannuation in promoting saving.

And let’s not forget that while superannuation may promote saving in the form of superannuation, it also can encourage offsetting incentives for people to take out bigger house mortgages than would otherwise be the case, for instance. The argument is that because people know they will receive a hefty lump sum from superannuation on retirement, they can use this, or part of it, to pay down the mortgage. There is clear evidence that more and more people have outstanding mortgages into their 60s. Of course, this
partly undermines the principal purpose of superannuation, which is to fund retirement incomes.

The development of the superannuation industry in this country has been essentially chaotic and ad hoc. Few details were worked out initially, particularly in relation to who would manage the funds, how they would be managed and taxation arrangements.

The union movement clearly saw an alternative business model and pushed the industry super funds to have pole position. This was achieved by virtue of the default fund status given to them in industry awards and enterprise agreements. This protected position continues although self-managed superannuation has eroded their dominance.

The changes that have occurred through the years are almost impossible to track. We have moved from the 3 per cent contribution rate to 9.5 per cent. The industry — as opposed to the members — is desperate to see that figure lifted to 12 per cent, a move that was delayed by Joe Hockey as treasurer. The full 12 per cent is not slated to become compulsory until July 2025.

Aghast at this prospect, ASFA chief executive Martin Fahy told the conference that “all the vocal criticisms of financial services, and within that superannuation, means that superannuation is vulnerable to short-term populist thinking, where somebody would try to appeal to people with an offer to have a sudden increase in take-home pay at the cost of long-term retirement funding. We need to be conscious of that because the 9.5 per cent super guarantee levy won’t get us there. We need to get to 12 per cent.”

This raises the question about where we are going when it comes to superannuation. It was only after more than two decades of compulsory superannuation that the government decided to legislate the purpose of superannuation “to provide income in retirement to substitute or supplement the Age Pension”.
Whether this objective really gets us anyway is unclear because a dollar supplement to the Age Pension would meet the test. The government is forcing people to give up 9.5 per cent of their current pay (and the industry wants this to rise — good luck with that in the context of low wage growth) to provide a potentially meagre supplement to the Age Pension. It is understandable why people may be querying the whole basis of superannuation.

The industry is also frightened at the prospect of being dragged into the banking royal commission. But superannuation is, after all, providing financial services, banks are involved in superannuation and there is even talk of superannuation funds providing debt finance for companies and home buyers. It would be an artificial distinction to exclude the broader superannuation funds from the inquiry.

One useful line of inquiry would be to examine the excessive fees and charges that the superannuation funds impose on members, thereby limiting their final payouts and incomes in retirement. By international standards, these fees and charges remain extremely high even though they have come down slightly with the rise in funds under management.

And let’s not forget superannuation’s role in insurance where members are forced to take out death and disability cover unless they undertake the laborious process of opting out. This arrangement was a clear favour given to the industry by the previous Labor government — thanks, Bill Shorten — but creates a clear distribution of benefits to older, better-paid workers from young, low-paid workers who really don’t need insurance in most cases.

Then there are the complex arrangements in relation to taxation and contribution limits that this government has made much worse. By lowering the concessional contribution cap to $25,000 a year, the proportion of the population who will be totally self-reliant in retirement in the future will probably drop even further from its modest projected figure of 20 per cent.

In combination with other restrictions, superannuation has clearly lost its allure as an investment vehicle for many individuals. And the clear message is that the government is not to be trusted in this area. After all, Financial Services Minister Kelly O’Dwyer, speaking at a previous ASFA conference, described superannuation tax concessions as a gift from the government.

There was a strong message in this statement and it raised fears that future governments would seek to impose higher taxes on present and future superannuation members.

The bottom line is that superannuation in Australia has grown like Topsy but with little rhyme or reason. It’s the best game in town for those who are employed directly or indirectly in the industry, and it’s a great arrangement for trade unions, which continue to haemorrhage paid-up members. Whether it’s a boon to present and retired superannuants is an open question.

(emphasis by Save Our Super)

The Australian

2 December 2017

James Gerrard

It shouldn’t be this way but our new superannuation system with its series of caps and reduction in pension access has thrown up some unlikely outcomes — the contradiction that you may be better off having less money saved if you want a more comfortable retirement.

If you play your cards right and work the rules, you can hit a savings sweet spot and maximise your retirement income through a mix of private savings and age pension. Not only that, but you also may be able to retire seven years earlier than you thought.

In 2006, the super changes brought in by the Howard government simplified the retirement system that over time had built up a large number of complexities such as reasonable benefit limits.

Save Our Super head Jack Hammond, a retired QC, says: “The rules were set in a strategic framework of lengthening life expectancies, rising incomes and expectations of higher retirement living standards, so that people could save for themselves, with declining reliance on the age pension.”

The more you saved, the more you would have in retirement. The age pension would kick in to supplement your base level of income but wasn’t designed to replace the incentive to save and become self-funded.

Today, Hammond believes super and Centrelink changes are counter-intuitive and “short-sighted, lacking proper long-term modelling, and have resulted in the odd way we have with the way retirement income is received”.

“It’s been a race to the bottom as both major political parties turn superannuation at best into a budget proposition rather than a longterm savings policy that it was designed to be,” he says.

From January 1 this year, the means testing of pension benefits was changed. The government reduced the maximum amount of assets you can have while still receiving a part age pension. In addition, it accelerated the rate of reduction in pension entitlement for those with assets over the cap for a full age pension. They changed from $1.50 reduction in fortnightly pension for every $1000 of assets over the cap to $3 reduction for every $1000 over.

People in retirement usually generate income from two sources. The first is accumulated savings, such as investment property, term deposits and super accounts; the second is the age pension. For a homeowner couple who meet all other eligibility rules, assets below $380,500 (excluding the family home) result in a full age pension, while a part age pension is received with asset levels up to $830,000. Previously, up to $1,178,500 in assets could be held before the pension was cut off completely.

The result: retirees who have reached age pension age are caught in a trap where they are penalised for having built up more savings by having their age pension cut off much faster, and at much lower asset levels.

Save Our Super, with the help of Sean Corbett, an economist with more than 20 years’ experience in the super industry, has modelled retirement income levels based on a mix of age pension benefits and drawdown of super at a rate of 5 per cent a year, the legislated annual minimum drawdown percentage for those 65 and older.

They found that depending on your marital status and housing situation, there were optimal levels of savings to maximise retirement income via a mix of super and age pension benefits.

● Single person with home — no more than $300,000 in super to get $33,958 a year income.

● Single person renting — no more than $550,000 in super to get $42,549 a year income.

● Couple with home — no more than $400,000 in super to get $52,395 a year income.

● Couple renting — no more than $650,000 in super to get $60,833 a year income.

To highlight the disadvantage of having more assets: for a couple who own their house and have $800,000 in super, their estimated annual income is $41,251, whereas if they have only $400,000 in super their estimated annual income increases to $52,395. This is because a couple with $400,000 in super would get 94 per cent of the full age pension payment, while a couple with $800,000 in super would get just over 1 per cent of the full age pension payment.

So here is a legitimate strategy: to access super tax free, you must be over 60, fully retired and receive a super pension, technically known as an account-based pension. But to receive the age pension, for those born after January 1, 1957, you must be 67.

Knowing where your savings sweet spot is likely to be at 67 allows you to plan early and potentially have an early retirement, drawing down on super in those earlier years of retirement to hit the sweet spot by 67. In other words, if you had $800,000 in super at 60, you potentially could retire at 60, spend $400,000 on living expenses, travel and renovating your home. When you reach 67, you have worked your super balance down to $400,000, which is the savings level sweet spot for a couple who own their home.

Crucially, this is if you’re happy with the sweet spot income, which is $52,395, you are willing to rely on the government not changing the rules again, and you do not aspire to having substantial savings that you can dispose of as you like.

There is also a breakthrough point on the upper end whereby you can generate more than the savings sweet spot level of income, but the wealth needed is quite a jump. For a homeowner couple, to generate more than $52,395 a year income you are estimated to require at least $1,050,000 in super.

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

(emphasis by Save Our Super)