The Australian

29 November 2017

Glenda Korporaal

When leaders of the $2.5 trillion superannuation industry gather in Sydney today for the Association of Superannuation Funds of Australia’s annual conference, the increasing regulation of the industry will be a key theme.

Australia has one of the best retirement savings systems in the world — a compulsory superannuation regime that is widely accepted and has increasingly focused ordinary people on the importance of putting money away for their future. But the danger is that constant regulatory changes, the progressive cutting back of tax concessions, criticisms of the system and now the prospect of another round of politically generated inquiries will erode confidence in a system working well.

There is always room for improvement. The compulsory 9.5 per cent needs to move up to 12 per cent to generate more adequate levels of savings, and there needs to be more focus on generating post-retirement income products.

But the system that has built up in the past 30 years has generated an impressive capital pool of $2.5 trillion and meant that Australians have been far more focused on saving for their retirement than they have ever been before.

Superannuation is an industry that involves a high level of public trust and needs good regulation.

But the unexpected tax changes under the Turnbull government announced in the 2016 budget and that came into force this year have shaken the confidence of many people about making extra voluntary contributions.

There is also uncertainty about what might come out of the Productivity Commission’s review of the efficiency of the superannuation system.

The commission is expected to deliver an interim report early next year and a final report later in the year. That report has the potential to deliver recommendations for more regulation and changes.

As ASFA chief executive Martin Fahy points out, there has been much criticism that the super system is not working because the government is still spending significantly on the aged pension.

But the fact is that compulsory superannuation — and the broader savings culture it has generated — is resulting in more people moving from the full aged pension to a part pension and, over time, to becoming self-funded retirees.

As Fahy points out, while the amount being paid in pensions is large as a percentage of the economy, particularly going into the future, it is set to be far less than in many other OECD countries.
The new level of concern is that superannuation is in danger of being drawn into the attacks on the banking system.

What started out as a criticism of the activities of the big banks is in danger of producing yet another layer of regulation and control of the superannuation system.

There is a danger that Trump-like populism will not only erode confidence in the system but lead to more regulation that could inhibit the growth of the industry and its potential to play a more effective role in the economy.

In a surprise move in this year’s budget — particularly for a conservative government — the Coalition announced the banking executive accountability regime, which will give the Australian Prudential Regulation Authority the ability to review the appointment of bank executives and their remuneration packages.

There is increasing concern that this will all too easily roll over into the superannuation and insurance industries. And increasing anti-bank sentiment, which is playing into political uncertainty in Canberra, now seems almost certain to draw in the superannuation industry in any inquiry to be announced.

It is one thing to question the banks’ role in Storm Financial, or to raise questions around practices adopted by CommInsure, or the bank bill swap rate allegations, or bank ATM fees, or the allegations made by anti-money laundering agency Austrac against CBA.

But just how this should lead to an inquiry or even a royal commission that takes in the superannuation industry, which has already been subject to a raft of reviews and regulatory tightening over the past decade, defies logic.

There is also a difference between banking and superannuation at the grassroots level. While Australians may have complaints with their banks — from fees to issues around loans, and concerns over the financial planning industry — there has not been a groundswell of member complaints about super funds per se.

The superannuation system is not broke and there is a danger that the rank populism we are now seeing amid the increasing political uncertainty in Canberra can add to an erosion of confidence in the system that is already occurring as a result of the constant government changes to the super tax regime.

Super industry leaders argue that reviews of the super system be linked to the five-yearly intergenerational report. This would provide some consistency in the logic around any changes to the system.

Fahy argues that the super industry needs to redefine itself as a retirement savings industry with a broader focus on issues such as aged care and how people manage their finances while in retirement.

The increasing longevity of the population has created big issues to deal with.
What is needed is an approach that takes a broad look at the challenge of our ageing population and our retirement system.

The issue needs long-term thinking that builds on the bones of the good system we already have in place — not short-term populism where various political agendas might undermine confidence in the system.

(emphasis by Save Our Super)

Spectator  Australia

4 November 2017

Michael Baume – Former NSW Liberal Federal Parliamentarian

There was no cost/benefit analysis; it was opposed by the government’s financial advisor, the Treasury; it has ballooned over 25 years into a $2.3 trillion industry with serious systemic problems. But compulsory superannuation is a Labor sacred cow – and is being milked for billions of dollars. It was Paul Keating’s gift to the ACTU’s Bill Kelty and was more about union power and keeping Kelty on side with the Accord than its stated welfare and budgetary objectives. Labor governments have certainly delivered on this key political promise to offset the loss of union power resulting from collapsing membership numbers by delivering increasing financial power to the union movement. As Keating told the 1992 ACTU Congress as his government was introducing his compulsory superannuation legislation: ‘You are losing your industrial muscle; I have given you the opportunity to take on financial muscle. You will get that through your superannuation funds. It is time you entered self-management’. This was consistent with the 1981 ALP Special National Conference paper that: ‘We must recognise at this early stage of union involvement in the superannuation issue that control over the funds will provide unions with considerable financial leverage… to be used to advance the cause of Socialism’. Labor super policy since then has consistently been built around that key pro-union objective, resulting in the phenomenal growth of assets managed by the union dominated Industry Superannuation Funds to $545 billion – most of it coming from non-union members.

As for the stated objective of improving retirement incomes, particularly at the lower end, and cutting the rapidly rising future cost to governments of pensions, Keating eventually admitted four years ago that compulsory superannuation ‘was not introduced as a welfare measure to supplement the incomes of the low paid. It was principally designed for middle Australia, those earning $65,000 to $130,000 a year. This is not to say that those [on lower incomes] should not benefit equitably from the super provisions. They should. But for middle Australia, compulsory super and salary sacrifice was and is the way forward’. And it would also provide a far more rewarding source of the billions of dollars the unions would get to manage than a scheme aimed at low income earners. So much for the need to ensure pensioners are not in poverty; welfare organisations have objected, calling for the cancelling of tax concessions to fund necessary rises in pensions.

So Labor will determinedly block (or repeal) any substantial reform proposals that may emerge from the current enquiry by the Productivity Commission that would damage the present preferred position of union-dominated ISFs – and especially the default arrangements that give them the inside running for the $117 billion dollars a year contributed to APRA super accounts. Meanwhile, widespread concern about the present super system is being expressed across the political, academic and economic spectrum; it is inefficient, too costly, has failed to achieve its social objectives (there has been no marked reduction in retirees receiving the age pension) and has become a monster that is sucking up to an estimated $30 billion a year in expenses out of Australian retirement savings. But repeated and unsettling governmental fiddling with super over the last 25 years has not addressed the basic question: Is the present system in Australia’s best interests; do the benefits to retirees justify the $38 billion dollar a year costs to revenue of super tax concessions plus the consequences of a $117 billion a year reduction in current workers’ household incomes through compulsory super instead of higher wages. 25 years of Keating’s compulsory super has yet to demonstrate that its benefits to retirees and welfare savings are ever likely to exceed its costs. Headlines like ‘A super fail: 80 per cent retire on benefits’ and ‘Why do we have the world’s most expensive super?’ have been followed by Peter Costello’s public attack on the ‘gross inefficiency’ of the Australian super system, recommending that the union-friendly default arrangements should, instead, go to a government-administered fund; the very successful Future Fund, which he chairs, costs far less to run than the rest of the industry. Don’t hold your breath.

The Weekend Australian

30 October 2017

Dennis Shanahan – Political Editor

The Coalition can’t rely on assumptions it will be seen as the better economic manager

The swearing-in this week of Labour’s Jacinda Ardern and New Zealand First’s Winston Peters as Prime Minister and Deputy Prime Minister to replace one of the most economically successful New Zealand governments generally has been ascribed to the global politics of the new and  disruptive.

Although Ardern did not win the election, her remarkable success and the continuing success of the nationalistic Peters were built on a campaign against a failure of capitalism in New Zealand, where economic transformation under John Key’s National Party had “not delivered” for all New Zealanders.

Ardern’s priority is addressing the high level of homelessness in a prosperous New Zealand and she has already banned foreigners buying more residential property.

Peters’s campaign was typically protectionist, with one of his first demands being for New Zealand to abandon attempts to keep alive the Trans-Pacific Partnership trade pact, cut to ribbons by Donald Trump’s US withdrawal.

As with Trump’s election, the British votes to leave the EU and hammer Theresa May’s Conservatives, the election of France’s youngest president, Emmanuel Macron, and Malcolm Turnbull’s one-seat escape from defeat, the rise of Ardern was unexpected and viewed as an “outsider” phenomenon. But clear evidence is emerging in Australia that Labour’s victory in New Zealand and Bill Shorten’s success against the Coalition in last year’s election are the result of more fundamental and longstanding electoral changes.

Apart from all the third-way populism of the newcomers there is a structural change stalking the Liberals and Nationals in Australia that requires a rethink of the Coalition’s electoral strategy of simply relying on being “better economic managers”.

The turfing out of Bill English, Key’s partner in rebuilding the New Zealand economy, could be seen as a parallel to the defeat of John Howard in 2007 after Howard and Peter Costello applied traditional Coalition principles and policies of economic management to debt and deficit.

Essentially, voters had become complacent about the economy and decided a new fresh face — Kevin Rudd — deserved a turn.

Yet, according to new electoral analysis at the Australian National University, Rudd’s success in 2007 and Shorten’s near-miss last year are linked to long-term changes of circumstances and attitudes among Australian voters.

The study suggests centre-right parties such as Liberal and Nationals may be facing institutional changes that give centre-left parties such as Labor and the Greens permanent political and strategic advantages in winning elections.

Ironically, these emerging advantages are sourced in decades of Coalition policies encouraging home ownership, share ownership, property investment and selfmanaged superannuation funds. The efforts to make individuals responsible for creating their own wealth and managing their investments has succeeded to such an extent in Australia that it is changing the voting dynamic
(emphasis added).

In short, asset ownership and specific policies relating to those assets are beginning to be more important factors in how key people vote than the overall health of the economy. The Coalition can no longer depend on its historical advantage in being seen as a better economic manager than Labor.

Analysis by the ANU’s Ian McAllister with Indiana University’s Timothy Hellwig on the effect of   asset ownership on voting shows Labor is best placed to take advantage of the rising importance of assets in economic voting.

The traditional political and academic arguments are that parties of the centre-right will favour free-market economic policies that suit homeowners, property investors, shareholders and selffunded superannuants as part of economic policy and those people will vote for the “economic managers”. The other side is that the centre-left will favour intervention to help those without assets and will be supported by those without assets. But after analysis of last year’s Australian election study and elections going back to 2001, the ANU conclusion is that these assumptions are flawed because asset ownership in Australia has ballooned since the 1990s and voters see little difference in the economic aims of the main parties.

Asset ownership, coupled with a tendency for more Australians to make up their minds about how to vote later in a campaign, are combining to give Labor an advantage.

According to McAllister, the assumptions on economic management and previous views on asset ownership “ignores how parties can shift their positions on these issues”. This shift on specific policies affecting asset ownership changes the reaction of “economic” voters and, according to   the ANU study, there is a more pronounced effect as a result of “the centre-left’s decision to oppose free market policies in  particular”.

“Our emphasis on party politics indicates that the electoral payoff of an ‘ownership society’, often cultivated by the centre-right, depends on the policies advanced by their competitors on the centreleft,” the study concludes. “We find that asset owners are more likely to support the centre- right. The magnitude of this effect, however, depends on the relative policy positions advertised   by parties.”

The conclusion is that when party economic policies converge “the strategies of the left-leaning parties carry greater weight” in economic voting. Essentially, Labor has the ability to attract more economic voters when it adopts “centrist policies” and offers specific policies on asset ownership.

In 2007 Rudd as opposition leader cleverly described himself as an “economic conservative” and revelled in the criticism that he was “John Howard-lite”. Being equated with the Howard government on economic management while offering a softer edge on social issues was what Rudd wanted.

Since the 1950s all major parties have encouraged home ownership and property investment, and the vast privatisation schemes of the Hawke-Keating and Howard-Costello governments lifted Australians into global-scale shareholders as superannuation became the second most important investment after the family home. The ANU study says “Australia represents an ideal case study to examine the impact of assets on the vote” and the parties have not stuck to a simple left-right position on the treatment of those assets (emphasis added).

“The role of the political parties is crucial to evaluating the effect of ownership of these assets on vote choice,” the study says.

At the election last year the Coalition and Labor adopted policies on the treatment of superannuation and negative gearing on investment properties that had a big effect on voting.   For the Coalition the changes to high-end superannuation — where voters are susceptible to   high risks to their assets — and the retrospective nature of the changes had an adverse effect on votes (emphasis added). For Labor the decision to limit negative gearing tax advantages for investment properties   to new housing was seen as a great political risk and portrayed by Turnbull as “destroying the housing market in Sydney and Melbourne”. But Labor ensured there was no retrospectivity, so existing investment properties were not affected, and linked the changes to making housing   more affordable by limiting investors in the housing market.

The ANU analysis shows Labor’s position on negative gearing is a positive overall because it does not turn away existing investors and appeals to those who don’t own a home because they think   it will help renters or aid them in getting a home.

“When the Liberal and Labor parties are perceived to be far apart, then asset ownership strongly influences party choice,” the study found. “But when the parties converge in policy space, ownership has little or no effect. We further show that this party system effect is driven not by the position-taking strategies of the Liberals on the right, as most stories of policy reform would have it, but of Labor’s position on the left.”

The Coalition can no longer rely on general economic management to deliver an electoral advantage and needs to understand that individual policies can have a broad effect on the vote. Labor’s ability to align with economic policy and not frighten investors gives it a strategic advantage.

Quadrant

27 October 2017

James Allan

Prognostications about the mind of the High Court and the fate of Barnaby Joyce having joined the long list of his failures, one might think the party of Malcolm Turnbull would be mulling a new leader. Alas, common sense and the survival instinct, like principle, are alien to the Liberal In Name Only crew

The last few days have brought Team Turnbull yet another bad poll. Tick-tock, tick- tock. In terms of calendar months, rather than number of polls, Prime Minister Turnbull’s government has now been behind Labor for pretty much as long as Prime Minister Abbott had been when Turnbull and the 54 bedwetters defenestrated a first-term Liberal PM – giving as their reason that he had been too long behind in the polls. A truly pathetic rationale, I know, for any political party that thinks about long-term party unity.  Or medium term for that matter.  Heck, that thinks past the end of the calendar year. 

But there you have it. And an eternal truth about human nature, what all the Niki Savva-like critics of us Delcons try to wish away but never will, is that what’s good for the goose is good for the gander. Turnbull will be without any legitimacy inside his own party once bad poll 30 arrives.  Indeed, as I noted above, Malcolm has already served as much consecutive ‘bad poll’ time as Abbott had when the George Brandis and Christopher Pyne wing of ‘Labor-lite Libs R Us’ decided to appease the ABC, defenestrate Tony and install a man who seems to lack a single conservative view. It is only by the grace of Newscorp, and the much slower and less frequent rate at which they are conducting polls, that Team Turnbull has not already suffered some 30 bad polls in a row.

Other than the usual suspects of Niki Savva, PVO, David Crowe, Paul Kelly and those in paid employment with the Liberal Party, is there anyone who does not recognise Malcolm as a dead man walking? You can’t even pretend Turnbull’s unpopularity has anything to do with forcing through needed tough medicine.  This is a government that has thrown billions of dollars at an idiotic submarine contract in a bid (hopefully unsuccessfully) to retain Christopher Pyne’s seat and that has attacked the superannuation system in a way that means spending a working life’s saving $1 million puts you in the equivalent net position as someone saving $400,000 (once you account for the Age Pension) which cuts to the heart of, well, thrift, hard work and basic Liberal Party beliefs while making all Kelly O’Dwyer’s recent assurances that the government won’t attack superannuation again simultaneously pathetic and unbelievable
(emphasis added).

Oh, and this is a government that can’t get the budget to surplus in any realistic way (as opposed to ‘we’ll grow our way to surplus’ platitudes), even with ever more taxes – sorry, ‘budget savings’ as our Big Government Treasurer Scott Morrison, a la Wayne Swann, likes to call them – and can’t rid us of the impoverishing RET, and does nothing about the patently leftward biased ABC nor the various inroads that have been made into free speech in this country. Indeed, this government is authoring some of those speech-stifling inroad! And that’s just the start of the list of ineptitudes and Labor-lite decisions emanating from this most leftist of Liberal governments. Hey, but they’re a millimetre better than Shorten right?

Yet still there are no murmurs of a spill or a ‘give to Turnbull what he himself dished out’ within the Liberal partyroom. Why?

1. 1. Is it because too many Coalition MPs have resigned themselves to defeat and figure another year and a bit with all these perks is better than rocking the boat?
   2. Is it because it turns out that the Liberal partyroom is chock full of Labor-lite MPs who hate conservatives at least as much as they hate Labor, possibly more, and don’t really want to protect free speech, cut spending, shrink government, encourage thrift or challenge the perverse consequences of unthinking global warming hysteria
   3. Is it a function of the fact that far too many Liberal candidates are pre-selected from the narrowest of gene pools – political staffers, no successful career in anything else beforehand, think tanks, and of course lawyers – and don’t really hold any principles as sufficiently important to imperil their own positions by speaking out against bad government policy or, heaven forbid, crossing the floor?
   4. Is it sheer cowardice, or stupidity?
   5. Is it all of the above?

Lest you be tempted to put this woeful policy record down solely to our puffed-up and comparatively democratically deficient Senate (and I put myself second to none in thinking our Upper House is a big, big problem), let me disabuse you of that conceit. You see, when it comes to appointments to key positions – the ABC, the Human Rights Commission (‘HRC’), the judiciary, the list goes on – this Team Turnbull government is wholly unconstrained by the Senate. It was this supposedly Liberal government that appointed Ed Santow to the HRC as the so-called ‘Freedom Commissioner’, with no veto or input from the Senate – a man who has said not a word in defence of Bill Leak or the QUT students. Ditto Herr Turnbull’s unconstrained-by-the-Senate choices of Michelle Guthrie and Justin Milne to run the Green-Left TV Collective, aka ‘our’ ABC (when Guthrie bags the mooted media reforms and sees no bias anywhere one can only smile.)

Again, the same goes for picking Alan Finkel and David Gonski to deliver reports. It makes you wonder if Brandis and Turnbull actually know any conservatives, or least any they don’t hold in evident contempt. Because they sure don’t appoint any to anything important. (Note: The Abbott government wasn’t great on this front either, Lord knows why, but it was better than the current mob of ‘Liberals in Name Only’.) And on the same theme, if after what happened to Bill Leak and the three QUT students you can’t even bring yourself to close down the HRC and put “Call-me-and- complain-Tim” out of work, or even try to do so, then you might at least pick a president more obviously supportive of free speech and less in thrall to international, judge-driven, democracy-enervating human rights ideas than Rosalind Croucher!

Run your eye over those names above and tell me which ones Labor couldn’t have appointed.  Good luck.  And that had nothing to do with the Senate.

So if someone claims that this is the worst collection of Liberal Party politicians in Australian history, what would you say in response? Meanwhile the bad polls keep coming.

SuperRatings & Lonsec
Day of Confrontation 2017
Grand Hyatt, Melbourne

12 October 2017

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

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

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

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

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

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

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

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

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

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

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

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

I will come back to that in a moment.

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

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

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

Average Retirement Benefits

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

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

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

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

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

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

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

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

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

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

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

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

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

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

What could be done?

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

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

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

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

(c) Private savings.

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

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

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

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

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

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

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

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

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

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

The Concentration in Australian Equity Markets

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

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

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

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

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

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

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

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

Banks never have to fear a flight of Australian investors.

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

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

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

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

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

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

Peter Costello

Former Treasurer of Australia – (1996 – 2007)

The Australian

17 October 2017

Judith Sloan – Contributing Economics Editor

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Australian Financial Review

12 October 2017

Satyajit Das

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The Australian

14 October 2017

James Gerrard

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

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

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

So what does a “comfortable” retirement look like?

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

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

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

A big ask for anyone

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

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

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

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

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

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

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

Open doors to income

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

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

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

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

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

The Australian

11 October 2017

James Kirby

More changes are looming in the superannuation sector

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

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

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

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

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

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

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

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

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

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

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

$1m was currently under consideration.

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

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

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

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

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

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

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

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

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

Background

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

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

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

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

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

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

Deceased’s TRIS was not in retirement phase

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

Recipient is not in retirement phase

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

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

Recipient is in retirement phase

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

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

Deceased’s TRIS was in the retirement phase

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

Recipient is not in retirement phase

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

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

Recipient is in retirement phase

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

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

ECPI exemption

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

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

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

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

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

Conclusions

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

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

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

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

*        *        *

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

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

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

DBA LAWYERS

5 October 2017

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