Aaron Hammond

Australian Financial Review

18 December 2016

Sally Patten

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The Australian

17 December 2016

James Kirby

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

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

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

In turn, that means two things:

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

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

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

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

Treasury did not sufficiently model these changes.

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

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

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

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

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

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

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

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

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

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

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

The only way forward

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

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

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

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

What’s an investor to do?

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

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

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

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

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

The Australian

16  December 2016

David Crowe

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The Australian

9 December 2016

David Crowe

Malcolm Turnbull has good reason to be on permanent alert for a revolt from the Right. As the farce over climate change this week showed again, the conservative wing of the Liberal Party is quick to flex its muscle when its views are challenged.

But how powerful is that bulging bicep? On at least one issue this year, the threat from the Right looked far bigger than it really was.

The superannuation tax changes, made law last week after gaining royal assent, brought out all the Coalition’s internal anxieties. Critics of the changes warned of a voter backlash. Conservatives threatened to walk. “If the government’s superannuation policy does not change, I will be crossing the floor,” Liberal National Party MP George Christensen declared. He and others got their way: the bills were legislated only after Scott Morrison and Kelly O’Dwyer replaced the hated $500,000 lifetime cap.

The backlash was real. The political pain was severe. But the revolt should not be exaggerated. When the July 2 election results came in, the government found it had a problem with “battler” voters in marginal seats, most of them untouched by a tax increase on super accounts worth $1.6 million. The anger felt by the Liberal Party’s wealthier supporters did not turn into a powerful force at the ballot box.

Polling booth by polling booth, the government held the wealthier suburbs and lost ground in Middle Australia. This shows up in the results for Hughes, an electorate in southern Sydney that extends from the apartment blocks of Sutherland to the waterfront homes along the Georges River and the suburbs of Liverpool.

Liberal MP Craig Kelly held the seat against a 2.5 per cent swing, but the threat came from the Left, not the Right. At the Sutherland Uniting Church Hall, where 1865 formal votes were cast, the swing against Kelly was 6.8 per cent. The swing to Labor was 7 per cent.

The same thing happened in other parts of Sutherland, where Labor and the Greens gained ground. Another battler suburb, Kirrawee, where the median income was about $1400 a week in the 2011 census, also swung against Kelly. His primary vote was down 4.7 per cent and Labor candidate Diedree Steinwall was up 5.7 per cent.

Compare that with Illawong, a suburb that juts out into the Georges River. Here, where the median household income was about $2300 a week, the swing against Kelly was just 2.4 per cent. Labor lost votes. The big winner was the Christian Democratic Party, up 4 per cent.

There was a stronger swing against Kelly in Alfords Point, with a median income of about $2500. Voters here swung against Kelly by 4.7 per cent. The gains were split between the Greens, the Christian Democrats and the Animal Justice Party. That wasn’t a backlash from the Right. The wealthier part of the electorate gave the Liberals one of their best results. If fury over super was driving this shift it would hardly make sense to back the Greens.

The Christian Democratic Party was not running hard on super. While it argued for a “zero taxation” policy on super contributions and payouts, this commitment was on page 27 of a 48-page policy booklet.

The same trends were on display in the electorate next door, Cook, held by Morrison since 2007. The Treasurer suffered a swing against him of 2.7 per cent but the trend was greater in areas that probably had smaller super balances. In Cronulla South, for instance, he suffered a 3.3 per cent swing. Barely any of it went to Labor. The Greens gained 2.2 per cent, the Christian Democrats gained 2.6 per cent and an independent, John Brett, saw a similar swing. The big factor was the absence of the Palmer United Party, which won 3.6 per cent in the previous election. The median household income was about $1500 a week in Cronulla in the last census.

Compare that with Burraneer, a suburb of beautiful homes overlooking the Hacking River. Here, where the median household income was about $2400 a week, the voters at the Burraneer Bay Public School stuck with Morrison. The Christian Democrats gained about as much ground as the Palmer United Party lost. After preferences, the swing against Morrison was only 1.2 per cent.

The tax hike on super shifted some votes, of course. The Liberal Democratic Party turned it into an opportunity to woo Liberal members away from their party. The LDP’s NSW senator, David Leyonhjelm, kept his position in the upper house with the help of this one issue. Yet the party’s results were patchy in the lower house.

In the Victorian seat of Higgins, for instance, the LDP won only 1.2 per cent of the primary vote — or 1093 votes. This is O’Dwyer’s electorate and saw a furious local debate over the tax increase, although Victorian barrister Jack Hammond seemed to attract dozens of supporters rather than hundreds of them when his Save Our Super campaign held a town hall meeting.

The results in Higgins and elsewhere shoot down the theory that Liberals stayed loyal on their lower house ballot papers and took their revenge in the Senate. The LDP managed only 1.36 per cent of the Senate primary votes in Higgins, not much different to the house result and well behind Derryn Hinch and the Nick Xenophon Team. Hinch and the NXT both voted in favour of the super tax package.

Coalition MPs know the super debate made their election campaigns more difficult. They know the names of the volunteers who stayed at home this year out of frustration at the policy. Yet the issue was not the electoral poison some of the strongest critics claimed. Perhaps voters, even in wealthier parts of the country, understood that tax concessions had to change when the deficit was about $40 billion. Consider this when you are told conservatives are mobilising on an issue.

In the end, the super changes added a valuable $3bn to the budget bottom line while improving retirement balances for millions of workers on low incomes. They were prudent and fair. They were worth the backlash. Most important, the backlash was smaller than expected.

That may be worth remembering next time Turnbull is warned of a revolt from the Right.