Category: Newspaper/Blog Articles/Hansard

Politicians don’t want to meddle with super

Australian Financial Review

28 March 2022

Chanticleer – Tony Boyd

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

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

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

Not any more.

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

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

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

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

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

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

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

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

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

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

Doing nothing

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

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

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

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

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

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

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

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

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

The Weekend Australian

26 -27 March 2022

GEOFF CHAMBERS CHIEF POLITICAL CORRESPONDENT

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

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

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

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

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

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

……”

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

2 December 2021

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

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

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

Facts

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

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

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

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

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

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

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

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

Findings

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

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

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

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

Trust or SMSF deed updates

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

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

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

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

Implications

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

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

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

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

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

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

Conclusion

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

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

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ATO focus on CGT relief may have big impact on SMSFs

26 November 2021

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

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

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

Background

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

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

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

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

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

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

ATO hit list

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

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

Tax adviser actions

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

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

Recent case (Eichmann) on what is an active asset

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

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

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

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

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

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

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

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

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

Conclusions

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

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

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

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

26 August 2021

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

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

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

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

Current law and types of NALI

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

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

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

Background to NALI

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

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

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

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

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

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

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

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

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

General NALI

Section 295-550(1) provides:

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

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

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

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

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

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

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

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

“scheme” means:

(a) any arrangement; or

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

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

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

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

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

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

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

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

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

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

The ATO’s PCG 2020/5 states that:

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

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

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

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

Dividend NALI

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

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

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

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

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

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

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

(c) the rate of that dividend; and

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

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

(f) any other relevant matters.

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

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

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

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

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

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

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

Fixed and Non-fixed trust entitlement NALI

Section 295-550(4) provides:

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

Section 295-550(5) provides:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Conclusions

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

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

Disclaimer and legal notice

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

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

The Weekend Australian

18-19 December 2021

Richard Gluyas – Business Correspondent

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

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

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

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

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

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

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

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

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

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

 

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

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

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

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

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

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

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

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

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

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

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

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

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

The Australian

1 November 2021

Robert Gottliebsen – Business Columnist

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

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

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

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

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

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

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

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

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

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

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

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

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

This is elementary stuff.

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

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

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

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

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

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

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

Super test failures ‘looking to merge’, says APRA

The Australian

28 October 2021

Patrick Commins – Economics Correspondent

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

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

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

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

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

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

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

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

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

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

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

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

APRA puts more than 116 super funds on notice with retail sector in firing line

The Australian

20 October 2021

Cliona O’Dowd

The prudential regulator has taken aim at nearly 120 superannuation funds it says will struggle to remain competitive into the future, with the retail sector set to bear the brunt of the pain.

Australian Prudential Regulation Authority’s chief super enforcer Margaret Cole warned Wednesday that the sheer number of super funds and investment options in the market was a detriment to members. She said time was running out for 116 of 156 regulated super funds as mega funds bolster their position and influence.

While 17 super funds manage 70 per cent of all assets in the APRA-regulated system, a “shocking” 116 funds manage less than $10bn each, with the bulk of those — 78 in total — operating in the retail sector, Ms Cole said.

“It’s here in particular where we can see the potential vulnerabilities the retail sector faces in coming years,” she told a Financial Services Council event.

“Size is not the sole determinant of performance … But it is absolutely a key factor influencing not only member outcomes, but also the sustainability of outcomes into the future.”

Ms Cole, who was appointed to the regulator for a term of five years from July 1, said increased scale allowed trustees to spread fees and costs over a larger membership base while accessing higher earning investments in unlisted assets, such as major infrastructure projects.

“APRA doesn’t have a rigid view of what size a funds needs to be to compete with the emerging cohort of so-called “mega-funds”, but we broadly agree with industry sentiment that any fund with less than $30bn may struggle – and any fund with less than $10bn, without some other redeeming feature, will definitely struggle to stay competitive into the future,” Ms Cole warned.

 

The performance and sustainability challenges facing the smaller end of the industry long tail will not get any easier, she told the audience.

“If anything, they are likely to accelerate, as the mega-funds use their financial strength and higher profile to grow further by attracting new members, and fund stapling breaks the traditional nexus between employers and default super funds.”

Greater transparency, through APRA’s heatmaps and expanded data collection, and the recent Your Future, Your Super reforms, would make it easier for workers to identify the poor performers, and move their money elsewhere, she predicted.

Already, all but one of the 13 funds that failed the first MySuper annual performance test had seen a decline in membership, she revealed.

The named-and-shamed funds that failed the test include AMG Super, LUCRF, Colonial First State’s First Choice Employer Super Fund, Maritime Super, Christian Super and Commonwealth Bank Group Super. (See the full list here.)

“These drops are marginal to date but any reduction in scale is unhelpful for trustees trying to improve their performance,” Ms Cole said.

APRA is watching for a similar response when the results of the first performance test for choice products are published next August.

At the other end of the spectrum, the nation’s largest super funds are gaining 1000 new members every day, and $500m of net new cash flow each week, she noted.

“The funds (members) move to will often be those brands they are most familiar with, further bolstering the influence of the largest funds,” Ms Cole said as she pointed to the problems besetting the retail sector: substantially higher average administration fees than for MySuper products; far greater variation in performance; and significantly higher levels of underperformance

“The challenges many retail funds face will become evident in coming weeks when we publish the findings of APRA’s new information paper analysing the choice sector in preparation for our first choice product heatmap in December,” Ms Cole warned.

While the regulator’s analysis covers choice products in all industry sectors, including industry funds, the majority of products and options analysed were operated by retail funds.

As consolidation in the sector ramps up, Ms Cole warned smaller funds against “bus stop” mergers, telling them to join forces with larger, better performing funds.

Ms Cole also took aim at the sector’s “serial acquirers” who take over one fund after another and often move on to a new deal before bedding down the previous one.

“Given the time and cost involved in executing a merger, it’s vital the benefit to members isn’t squandered through poor execution or deferral of the integration needed to avoid problems down the track.”

Retail funds, in particular, should consider the benefits of consolidating their own product lines, she said.

How to future proof your super

The Australian

3 September 2021

James Kirby – Wealth Editor

If you consider that we have a compulsory system where everybody has to put away 10 per cent of their earnings into a super fund, it’s hard to believe the wider public had no way of comparing their fund’s performance until this week.

The release of the government’s super fund performance figures – and importantly the decision to name and shame the worst funds – is a genuine breakthrough. The trillion-dollar question now is what happens next?

It’s worth picturing what is going to occur when more than a million households will soon receive a letter from their fund telling them the most important investment in their life (outside of their home) is in a ‘dud’ super fund.

We should not be surprised if there is uproar from this unfortunate constituency where people who may not always keep up to date with the super industry will be confused and angry.

What’s more this group of stranded investors is going to get a lot bigger in the near future when the exercise is expanded to include all super funds.

In this first version of the performance assessment 13 funds out of 76 in the MySuper category failed to pass industry standards. (If you want to compare your current super fund and see how it fared alongside the 13 loser funds tagged as ‘underperforming’ then simply go to ato.gov.au and it’s all there under ‘YourSuper comparison tool. The best way to do this is to use your MyGov personal password if you have got one of those.)

Within those funds are big names. There are funds linked with CBA and Westpac along with well known industry funds such as the Maritime Super.

Importantly, the majority of the investors stuck in these loser funds were in so-called retail funds from banks and insurers. As expected, non-profit industry funds which often have trade union links were the overall winners.

So what are you supposed to do if you find you are in a dud fund? Should you contact the fund where some call centre operator will probably read a script telling you things are about to get better.

Should you pull out of the fund and move to one that has a better record. You will have to expect that the fund you pick this year (which will be on the basis of its recent performance) turns out to be just as successful in the future. Remember, statistics strongly suggest the winners of today are rarely the winners of tomorrow.

Or maybe you turn your back on institutional super entirely by opening a self managed super fund.

Top advisers suggested this week there could be a material increase in SMSFs when people realise they are in dud funds.

Perhaps this will happen, but you have to ask, would an SMSF be the right choice for people in this situation? Even if they were capable of running an SMSF would it be economically feasible? You need to digest costs of $3000 a year in fees to make an SMSF really work and that rarely makes sense for anyone with less than around $600,000.

Certainly people are more likely to switch funds if they are seriously worried – we know for example that switching activity inside big funds tripled in the immediate aftermath of the sharemarket crash last year.

What to do?

It just so happens that the super system is about to experience some very big changes that are mostly for the better. In a few weeks time – November 1 – the old arrangements where each successive employer could default workers into a different fund is due to formally end.

Combine this new era of stapled super (where you can choose to take the same fund with you through your working life) together with regular publication of performance tables and we are going to get a much more active super investing public.

This is the perfect juncture to explore the idea of a national super fund – a fund that would be run by the government and very likely managed by the Future Fund.

The idea has been bounced around for some time. However, ‘big super’ – industry or retail – does not want to hear about it. Similarly, Self Managed Super Fund professionals won’t like it because people might surrender their SMSF management to a government fund faster than an institutional fund – especially if it is run by an operation with scores on the board.

To be precise, first the government would have to launch the concept and kickstart a fund. It would then have to put the management of the fund out to tender. Under current circumstances, the Future Fund would simply have to win the mandate because it’s returns are exceptional. Across the spectrum, the worst super funds have been doing about 6 per cent, the best have been doing closer to 9 per cent – the Future Fund has been doing 10.1 per cent.

For the investor the winning aspect of such a plan would be that the regular competition to win the right to manage the money would mean it is always underpinned by the best funds – the Future Fund might not always be top dog.

What we got this week is improved transparency in the superannuation system, but we have not seen substantial improvement in the system itself.

Every investor – the apprentice starting out, the young family with multiple accounts, the older couple petrified of low interest rates – are all still mandated to make a choice.

A national fund would allow them to join a fund that sits above and beyond the current choices.

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