By Christian Pakpahan, Lawyer and Daniel Butler, Director, DBA Lawyers

On 24 May 2018, the government announced a 12 month superannuation guarantee (‘SG’) amnesty (‘Amnesty’) that proposes to give employers an opportunity to rectify past SG non-compliance without penalty. If the Treasury Laws Amendment (2018 Superannuation Measures No. 1) Bill 2018 (‘SG Bill’) is ever made law, the Amnesty period will apply from 24 May 2018 and run for a 12 month period to 23 May 2019.

We therefore recommend that Treasury and the Australian Taxation Office (‘ATO’) consider introducing the Amnesty when the law is actually passed rather than relying on legislation which still has to be passed by Parliament which will then have retroactive application to 24 May 2018. The Amnesty is already being actively promoted when no law exists and employers are already coming forward without reading the finer detail that the Amnesty is subject to the passing of the SG Bill into law. Further, the 12 month period already commenced to tick away on 24 May 2018 when the SG Bill was tabled in Parliament and no one knows when, if ever, the SG Bill will become law. In particular, it is understood that the Labor Government may not support the Amnesty. The many employers that have already made disclosures to the ATO on the basis of the proposed Amnesty may have therefore been misled. However, the ATO will broadly treat these as voluntary disclosures if the SG Bill fails to become law.

What is the SG Amnesty?

Current legislation

Under current law, failure to contribute the minimum 9.5% of an employee’s ordinary time’s earnings to the employee’s superannuation fund by the required time can result in a liability to pay the following:

1          SG charge (a sum of the total of each relevant employee’s SG shortfalls, nominal interest component, and a $20 per employee per quarter administration component);

2          penalties (known as ‘Part 7 penalties’) for failing to provide information or a statement as required under the law, which can be up to 200% of the amount of the SG charge; and

3          general interest charge imposed where the SG charge or Part 7 penalties are not paid by the due date.

Accordingly, an employer that fails to pay the required SG amount by the required time faces the SG charge, penalties and, where applicable, the general interest charge. The following example illustrates the substantial impact on an employer’s cash flow from this current SG system:

SG charge

Employers are broadly liable to pay the ATO an amount of SG charge equal to their SG shortfall for a quarter, which is the sum of the following for the quarter:

1          SG shortfall component, which is the total amount by which an employer has fallen short of contributing the minimum percentage for each respective employee;

2          nominal interest component, which is the amount of interest on the total of the employer’s SG shortfalls for each respective employee for the quarter calculated from the beginning of the relevant quarter until the date SG charge is payable; and

3          administration component, which is $20 per employee to which the SG shortfall applies for the quarter.

Broadly, SG charges are not tax deductible. This means that if you are late in paying the required SG to your employees, you will not be able to deduct that SG shortfall. You are also unable to deduct the nominal interest and administration components from the relevant SG charge.

Proposed Amnesty

The proposed Amnesty provides employers with an opportunity to rectify past SG non-compliance without penalty for a 12 month period. Under the proposal, an employer that has an SG shortfall amount that qualifies for the Amnesty is within any period from 1 July 1992 up to 31 March 2018 is provided with the following:

1          the ability to claim tax deductions in respect of SG charge payments made and contributions that offset the SG charge to the extent that the charge relates to the SG shortfall;

2          administrative component to the SG charge will not apply (ie, $20 per employee to which the SG shortfall applies per impacted quarter); and

3          Part 7 penalties will not apply.

That being said, employers will still be required to pay all employee entitlements, which include the unpaid SG amounts and the nominal interest (calculated at 10% per annum) owed to employees as well as any associated general interest charge.

What is required to qualify for the SG Amnesty?

Eligibility

Broadly, the SG Bill states that an employer qualifies for the Amnesty for the employer’s SG shortfall for a quarter if they satisfy all of the following:

1          during the Amnesty period the employer discloses to the ATO, using the approved form, information that:

(a)       relates to the amount of the employer’s SG shortfall for the relevant quarter; and

(b)       was not disclosed to the ATO before the Amnesty period.

2          The relevant quarter where SG shortfall is disclosed is 28 days before the Amnesty period (ie, the last eligible quarter would be the quarter ending 31 March 2018).

3          the ATO has not previously advised the employer that the ATO is examining, or intends to examine, the employer’s compliance with respect to SG charge payments for that quarter.

That being said, an employer may still qualify for the Amnesty if the employer has, prior to the Amnesty period, made disclosures about their SG shortfall for a quarter but comes forward with information about additional amounts of SG shortfall for the quarter.

This could occur where an employer has previously lodged an SG statement for the quarter which understated the amount of SG shortfall. If the employer otherwise met the qualifying criteria of the Amnesty, the employer can access the Amnesty to the extent of the additional SG shortfall amounts.

Ceasing to qualify for the Amnesty

An employer may cease to qualify for Amnesty (or be taken to have never qualified for Amnesty) where the ATO gives notice to the employer that it has ceased to qualify for the Amnesty due to one of the following reasons:

1          the employer has not, on or before the day on which SG charge on the employer’s SG shortfall for the quarter became payable, paid that SG charge and has not entered into an arrangement with the ATO that includes the payment of that SG charge; or

2          the employer has failed to comply with such an arrangement with the ATO.

Accordingly, once the Amnesty is accessed and disclosure has been made, the employer must follow through on payment of the relevant SG charges imposed due to SG shortfalls.

What is tax deductible from the SG Amnesty?

Deductions

Payments that are made within the Amnesty period in relation to SG charge imposed due to SG shortfalls disclosed under the Amnesty can be deducted against an employer’s assessable income in accordance with the deductibility rules in the Income Tax Assessment Act 1997 (Cth) (‘ITAA 1997’).

These payments can be deducted regardless of whether or not the ATO applies the payment to satisfy an employer’s liability to pay the SG charge imposed on the SG shortfall that qualifies for the Amnesty.

This ensures that employers that already had an outstanding SG charge debt prior to accessing the Amnesty are able to claim deductions for payments they make despite the ATO first applying their payments to clear their existing debt.

Payments made in relation to eligible SG charges imposed due to SG shortfalls can be deducted up to the amount of the SG charge. Therefore, an employer that has negotiated a payment arrangement with the ATO can claim deductions for part payments up to the value of the total SG charge eligible for the Amnesty.

How do we access the Amnesty?

If the SG Bill is finalised as law, employers will first need to calculate the relevant amounts of SG charge payable. Afterwards, employers can apply to access the Amnesty in one of two ways.

Full payment to relevant employee’s super fund

If an employer can make full payment of the SG shortfall and nominal interest amount for each relevant period and those periods qualify for Amnesty, the employer should:

(a)       pay the relevant amounts directly to the relevant employee’s super fund (or funds); and

(b)       complete and lodge the SG Amnesty Fund payment form (NAT 9599) with the ATO.

The form should be lodged on the same day the relevant SG amount is paid. This option is the simplest way to pay outstanding SG shortfall amounts, with general interest charge typically not charged.

Enter into a payment plan with the ATO

Alternatively, where the employer would like to access the Amnesty but is unable to pay the SG charge amount owing in full, the employer should:

(a)       complete and lodge the approved form, SG Amnesty ATO payment form (NAT 9599), with the ATO; and

(b)       pay the amount owing to the ATO pursuant to a payment plan.

If there will be difficulties in paying the full amount, a payment plan can be set up with the ATO to pay the amount owing over an agreed period. After the form is submitted, the ATO will contact the employer to set up a payment plan.

Are employers still required to pay all employee entitlements, this includes the unpaid SG amounts owed to employees and the nominal interest

If the Amnesty announcement does not get finalised as law, the “employers are still required to pay all employee entitlements. This includes the unpaid SG amounts owed to employees and the nominal interest”.

Thus, as noted in the example, an employer would generally need to calculate any SG shortfall based on salary and wages (rather than ordinary times earnings).

Further, the Amnesty does not extend to other employee/wage related events such as payroll or work cover.

Potential risks

Whether certain quarters do not qualify for Amnesty due to ATO examination

The explanatory memorandum of the SG Bill refers to the ATO’s views on the meaning of ‘examination’ explained in the ATO’s ruling in MT 2012/3. The ruling states that the term ‘examination’ is very broad and covers not only traditional audits which the ATO undertakes to ascertain an entity’s tax-related liability but any examination of an entity’s affairs.

A range of compliance activities undertaken by the ATO may involve an examination of an entity’s affairs, including reviews, audits, verification checks, record keeping reviews/audits and other similar activities. This means that any of those compliance activities may disqualify an employer from being eligible to access the Amnesty for that relevant quarter.

Accordingly, expert advice should be obtained before attempting to access the Amnesty.

Excess concessional contribution and smoothening of carry forward rules for employees

Contributions made under the Amnesty would broadly be considered concessional contributions and may cause employees to exceed their $25,000 annual concessional contributions cap.

Generally, employees are not subject to tax on their concessional contributions. However, concessional contributions in excess of the concessional contributions cap are included in the employee’s assessable income. The employee could also be liable to pay excess concessional contributions charge.

The Amnesty partly circumvents this where contributions are made by the ATO on behalf of the employer by streamlining the exercise of the ATO’s discretion to disregard contributions in relation to a financial year where contributions are made by the ATO on behalf of the employer due to the Amnesty.

However, the exception does not apply where the employer has made the contributions directly to an employee’s fund under the Amnesty and has used those contributions to offset their SG charge liability.

Accordingly, where employers make direct contributions to employee funds under the Amnesty, the employee may be subject to:

1          those concessional contributions being included as assessable income;

2          excess concessional contributions charge; and

3          an adjusted carry forward concessional contributions amount.

Conclusions

The proposed Amnesty still has to be passed as law before it will have actual effect. Further, there are still a number of serious modifications required to be made in order to make the Amnesty an appropriate basis for employers to come forward with legal certainty. Indeed, it would be preferable for the law to be introduced and passed before an amnesty of this nature is announced. We also recommend that the Government make the SG regime and penalty system more aligned to modern business practices rather than applying the current inflexible and substantial penalties even where an employer is only one day late.

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

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

18 July 2018

The Australian

25 July 2018

Glenda Korporaal – Associate Editor (Business)

Alistair, who worked as a human resources manager, and Merrill, a vice-principle in the Victorian education system, were both 55 when they retired.

They opted to set up their fund 15 years ago, a few months after Merrill retired, after doing some homework about what was involved in SMSFs. They still live in the modest house in Mooroolbark, in east Melbourne, which they bought in the early years of their marriage 50 years ago and paid off before they retired, opting not to move to a more expensive suburb closer into town.

Since then they have worked together on their investments through their SMSF in between spending time with their three children, eight grandchildren, golfing and a few overseas trips.

When they rolled their superannuation into their SMSF, its combined balance was well below the $1 million which the Productivity Commission says is the minimum cost-effective balance for an SMSF.

They disagree with this argument. And as they point out, when people set up their SMSFs funds they may have relatively low balances, but the goal is to manage their fund well and grow the balance.

They believe their SMSF is as cost-efficient as any other super fund. They also believe they have managed it with better returns than other super funds. But its big attraction is the independence and control it gives them to manage their own financial affairs in retirement free of outside interference.

More than a million Australians already have self-managed super funds with a total of more than $700 billion in funds.

Self-managed funds are not for everyone. In fact they are not for many people, particularly those not financially literate or prepared to put in the work to manage the fund and meet the necessary compliance requirements.

But their popularity among a certain sector of the population — financially literate professionals and retired professionals like the Lee-Archers — are a serious competitive threat to the established sector — both industry super funds and retail funds.

Moves to further restrain the growth of the industry with talk of government mandated minimum balances for people to set up SMSFs will only further play into the hands of their competitors in the APRA regulated sector.

The super industry is a competitive one. Costs are coming down. There is a lot of money at stake. Many people who have self- managed super funds believe they are at least as competitive as APRA-regulated funds on a cost basis, if not cheaper.

But costs are only part of the issue for retirees and people saving for their retirement. Retirees like the Lee-Archers see managing their super fund as like managing their own business and being in control of their lives, independent of government.

The issue of whether there should be minimum balances for SMSFs has been raised following the recent draft report from the Productivity Commission, which has been looking into the efficiency of the super system. It compared figures from the ATO about SMSFs and figures from APRA about other super funds and argues that SMSFs are not cost-effective when it comes to balances of less than $1m.

There is a valid argument that people with very low balances would be better off with conventional super funds. SMSFs do involve start up costs, payments to advisers such as accountants and possibly financial planners and other professionals, as well as a commitment of time and effort by the trustees.

But critics put the minimum cost-efficient level too high. The SMSF Association argues that balances of $200,000 would still make self-managed funds appropriate for people, particularly those with some way to go towards retirement.

The SMSF Association will today release a detailed paper which challenges the Productivity Commission’s calculations in making the comparisons. It argues that the approach used by the commission results in an effective bias towards the performance of the APRA regulated funds.

There is the issue of unscrupulous planners talking people into setting up SMSFs who really shouldn’t have one.

But the issue there should be on the regulation of the planners who are now legally supposed to be acting in the best interests of their clients — not to restrict the options of people saving for their retirement.

There has also been a real issue of property spruikers driving people to start self-managed funds and then use them to gear up to buy property. But again that should be addressed by controls on SMSFs borrowing to buy property, which is something many have recommended, including the last inquiry into the financial system headed by David Murray.

And of course people managing their own super may do it badly and lose money.

But we live in an economy where people should be encouraged to be independent of the government in retirement and that includes managing their own money.

SMSF members are highly engaged in their fund and their overall financial planning.

SMSFs only suit a specific sector of the market but they play an important competitive role in the sector, particularly for those who don’t want to bank on the government for their retirement.

The Australian

21 July 2018

Anthony Klan

The revelations come as The Weekend Australian can reveal the federal government’s long-delayed proposed changes to superannuation law — nominally aimed at closing a decades-old legal loophole that prevents super trustees from facing any penalties should they break the law — also contain a potential loophole.

The Weekend Australian has revealed widespread gouging by the big four banks, such as paying super members returns on simple “cash” investments as low as one-quarter of actual market rates — in some cases even negative ­returns — has had a devastating effect on long-term returns.

Audited performance data provided to the Australian Prudential Regulation Authority by Westpac, NAB, CBA, ANZ, AMP and IOOF shows the biggest super funds operated by each of those institutions — comprising five million member accounts — delivered average annual returns to members of between 2.1 per cent and 3.1 per cent over the ­decade to June 30 last year.

Those returns were roughly half the market rate for the types of investments those funds had actually made, roughly half the returns achieved by the major so-called “industry” funds such as AustralianSuper, and roughly half the returns of the super funds ANZ, CBA and NAB run for their own staff members.

Under the Superannuation Industry (Supervision) Act 1993, trustees must abide by strict rules, such as always acting in the best interests of members, and placing the interests of members ahead of the interests of the bank or company they work for, should any conflict arise.

The act stipulates penalties of up to five years’ jail and “punitive” damages, but as previously revealed, there was a carve-out in the law that meant the penalties did not apply to trustees of big super funds, and no federal government since 1993 has closed that loophole.

CBA chairman Catherine Livingstone, Westpac chairman Lindsay Maxstead, ANZ chairman David Gonski, NAB chairman Ken Henry — a former federal Treasury secretary — and AMP’s interim executive chairman Mike Wilkins, installed when the group’s chairman and chief executive stood down following recent revelations of fee-gouging by the group, all declined to respond to written questions.

Media representatives of each of those major banks and AMP would not confirm they had passed on The Weekend Aus­tralian’s questions to their chairmen, or say whether the chairmen had been made aware of the ­questions.

The issue is particularly serious given that the key responsi­bility of a chairman under corporations law is to ensure a company’s management acts honestly and legally.

The federal government has said its proposed changes to the SIS Act would reverse the 1993 carve-out of penalties for trustees of major funds, but the wording of the proposed changes suggests that even if the amendments are passed — they have been several years in gestation and the ALP is refusing to back them on the ground they are “limited and incomplete” — they may not apply to many trustees.

Rather than simply ensuring the penalties clearly stipulated in the SIS Act 1993 apply to all trustees, the changes state that trustees can face punishment only if they break the laws, and if those same laws are “contained or taken to be contained” in the governing rules of the super fund.

A spokesman for Financial Services Minister Kelly O’Dwyer said the proposed amendments did not create a new loophole.

The Australian

20 July 2018

Anthony Klan

The latest data from SuperRatings, widely considered to be one of the nation’s best super ratings data sets, shows super funds run by CBA, ANZ, NAB, Westpac, AMP and IOOF were consistently among the worst performers over the past 15 years, the longest time frame for which the most complete data is available.

The SuperRatings data shows the major industry funds, those funds run by employer and union groups, were overwhelmingly the best performers, not just last year but over three, five, 10 and 15 years.

The data looks at the “balanced” options of the nation’s 50 biggest super funds by number of members.

SuperRatings releases only the top 20 performers on the list, saying it is its “long standing policy” to do so, however The Australian has obtained the full list of 50 from a separate source, revealing the underperformance of the “retail”, or for-profit, funds.

Like SuperRatings’ general ­announcement yesterday, the Productivity Commission’s recent 563-page report into superannuation also did not disclose the names of the worst performers in the super sector in its rankings.

The banks and financial institutions aggressively fight against the ranking of their funds by the best analyst groups because their funds, with more than five million member accounts, consistently underperform, largely due to bigger fees and charges they levy on super account balances.

The top three performers in 2017-18 were the balanced options of industry funds HOSTPLUS, AustSafe Super and AustralianSuper. Those three funds also ranked in the top four performers over five, seven and 15 year timeframes.

The eight worst performing ­investment options on the list of 50 obtained byThe Australian were the balanced options of funds managed by ANZ, CBA, Westpac and AMP.

The overall performance of funds run by the major banks and financial institutions was likely even worse than reported, however, because those funds report only less than half of their products to SuperRatings, with those unreported products far more ­likely to be their worst performers.

According to the Productivity Commission report, in 2015, 100 per cent of industry fund super ­assets could be accounted for by data provided to SuperRatings.

But only 44 per cent of the super assets of retail funds could be accounted for by data those funds had provided to the agency.

The Productivity Commission report found that the further back in time, the less likely retail super funds were to report their performance to ratings agencies.

Data provided to SuperRatings by the banks and financial institutions accounted for 47 per cent of all super assets they managed in 2015, but that figure fell to 33 per cent when looking at 2010 and 27 per cent for assets managed in 2005.

There is more than $150 billion held in so called “legacy” funds, which are funds managed by banks and financial institutions that people joined before 2013, ­before new laws were introduced.

The funds are “closed” to new investors but continue to fully ­operate, generally charging far higher fees than funds are able to charge in today’s market, because scrutiny has increased.

As revealed by The Australian this week, Australian Prudential Regulation Authority data — which captures all super investments because funds are ­required, by law, to provide it with audited data regarding the performance of all their underlying “investment options” — further shows the systemic underperformance of retail super funds.

The APRA data shows the biggest funds operated by each of the Big Four banks, IOOF and AMP delivered returns lower than even the risk-free “cash” rate over the past decade.

Those six funds delivered total average annual returns to members of 2.1 per cent to 3.1 per cent a year in the 10 years to June 30, 2017, roughly half the market rates for similar mixed investments.

The Australian

19 July 2018

Cliona O’Dowd

The fund’s balanced option posted a 12.5 per cent return for the 2018 financial year, smashing the median return of 9.2 per cent across the industry, according to figures from superannuation consultancy Chant West.

“That’s an excellent result. It’s a record-equalling ninth consecutive positive year and well ahead of the funds’ own performance targets,” Chant West senior investment research manager Mano Mohankumar said.

“The better-performing funds in the year were those that had higher allocations to listed shares and to unlisted assets — property, infrastructure and private equity. A lower exposure to traditional bonds and cash also helped, given they were the worst-performing sectors.”

Even the year’s worst performers managed to hobble to the finish line with a respectable return of 6.5 per cent.

The median growth fund has now delivered a cumulative return of about 135 per cent since the 2009 low point and 72 per cent since the pre-GFC high in late 2007.

Hostplus chief investment officer Sam Sicilia said double-digit returns in its unlisted assets boosted the fund’s performance.

Its infrastructure and property portfolios each returned 12 per cent, while its private equity portfolio returned 15 per cent.

And while others are warning of more subdued returns in the years ahead, Mr Sicilia is more upbeat. He’s content to be an outlier in the market.

“If your view is the same as the market then you’ll get the market return. The market believes four things right now: that trade wars are inevitable and will be disastrous for markets; that interest rates are surely going up; that inflation sooner or later will go up; and that equity markets are overvalued and surely there’s going to be a correction. We take a contrarian view in all four of those,” Mr ­Sicilia said.

Sharemarkets would shrug off any trade war impact, he predicted, while interest rates in Australia were not going up any time soon, with the Reserve Bank “starting to waver on their outlook”.

Inflation, meanwhile, would remain low because of the deflationary impact of technology.

“Unless you can find a way to switch off technology you’re not going to find a way to generate inflation,” he said.

Hostplus’s equity exposure, sitting at 53 per cent, is made up of 25 per cent Australian shares, 20 per cent international shares and 8 per cent emerging market shares. The fund is looking at taking a little bit off the table in Australian shares — 1 per cent or 2 per cent at most — and moving it to international shares to gain more exposure to a broader range of industries.

It has a zero allocation to cash and a 2 per cent allocation to fixed interest that it would also soon move to zero, Mr Sicilia said.

The second-placed AustSafe MySuper Balanced fund, which recently announced it was merging with industry super fund Sunsuper, booked an 11.4 per cent return. Statewide Super placed third with an 11.3 per cent return, while AustralianSuper’s balanced option came fourth with an 11.1 per cent return. Cbus Growth rounded out the top five with an 11 per cent return.

Industry funds overwhelmingly dominated as the top performers, taking out every spot in the top 10 and returning an average 10.3 per cent last year compared with retail funds, which averaged 9.3 per cent. Industry funds have also outperformed over the long term, returning 8.1 per cent over the past 15 years compared with their retail peers, which returned 7.2 per cent.

“Over the longer term, industry funds have outperformed retail funds largely because of the way they allocated their investments and their preparedness to vary those allocations to suit changing market conditions,” Mr Mohankumar said.

“They tend to have higher allocations to unlisted assets such as private equity, unlisted property and unlisted infrastructure. This means they have less invested in traditional asset classes such as listed shares, REITs and bonds.”

Hostplus was the top-performing balanced fund in Australia over one, three, five, seven and 15 years, while UniSuper balanced was the best-performing fund over 10 years.

The Australian

19 July 2018

Anthony Klan

University of NSW Business School academic Kevin Liu, who earned his PhD investigating superannuation fund performance — and is a former internal researcher for banking and super watchdog the Australian Prudential Regulation Authority — said that the data was in fact the most accurate way to ­determine the performance of major funds.

“The theoretical argument is there can be many reasons for the underperformance of the retail funds … such as that analysis ‘doesn’t compare apples with apples’,” Dr Liu told The Australian.

“But we have created performance benchmarks … and this is not difficult and the methodology is not new. This systemic underperformance is not (due to) asset allocation. It’s not an investment manager’s skills. It’s fees and charges.”

Audited super-fund data provided to APRA by law shows that the biggest single-umbrella super funds operated by each of the CBA, Westpac, NAB, ANZ banks and AMP and IOOF performed vastly below market rates over the 10 years to June 30, 2017.

Those major funds have five million member accounts and hold $260 billion of the public’s money raised through the compulsory super scheme.

They have performed about half as well as the major so-called not-for-profit “industry” funds, and about half as well as super schemes that three of the major banks operate for their own staff members.

CBA’s Commonwealth Bank Group Super, which is open to CBA staff and their spouses, and which has 74,009 members with $11.06bn invested, delivered an average return of 5.4 per cent a year over the decade to June 30 2017.

By contrast, the biggest fund CBA sells to the public, the $72.1bn Colonial First Choice Superannuation Trust, which has 783,474 members, delivered ­overall average returns of just 2.9 per cent a year for the decade.

ANZ’s $36.2bn OnePath Masterfund, which is sold to the public via its vast network of financial advisers, and which had 949,486 members at June 30 last year, earned an overall return of 2.7 per cent a year over the decade.

However, the ANZ Staff Superannuation fund, which reported 31,688 members with retirement nest eggs worth $4.23bn, earned overall average returns of 4.7 per cent for the same period.

The major banks, AMP and IOOF have aggressively fought against this data being used to compare their performance and have provided a wide range of reasons why it is incorrect to do so.

However Dr Liu said not only were these claims incorrect, but that using this data provided “the most reasonable and accurate assessment performance” of a fund “because it reflects the overall ­efficiency of the firm as an independent operating entity”.

Further, APRA had long been aware this was the case: Dr Liu was the co-author of the peer-­reviewed APRA paper that proved it, and contained those exact words, in July 2010.

Dr Liu, then completing his PhD on the subject, had been employed as a researcher and his co-author, Dr Bruce Arnold, was at the time APRA’s head of policy, research and statistics.

APRA chairman Wayne Byres and deputy chairman Helen Rowell have repeatedly declined to comment when contacted about these issues by The Australian in recent weeks.

In a statement, an NAB spokeswoman said it was “inappropriate and misleading” to compare its performance using the legally audited APRA data.

The data shows that the super fund NAB operates for its own staff delivered vastly higher overall average returns over the past decade than a major fund it operated for the public.

“As we have previously stressed, to compare the performance of the MLC Superannuation Fund, which is a composite view of members’ individual investment choices, to the NAB Staff Super Fund, which is one investment option, is inappropriate and misleading,” the statement said.

The major umbrella funds, or “master trusts”, operated by the major banks, AMP and IOOF, typically have many underlying “funds”.

These funds in turn have hundreds of thousands of “investment options”, which invest in the actual assets, such as cash, shares, or government bonds.

The Australian

14 July 2018

Anthony Klan

The Weekend Australian can reveal the laws governing super trustees enacted in 1993 under then prime minister Paul Keating carry serious penalties for members of the public who operate self-managed super funds, but carve out those penalties in relation to corporate and “industry” funds that manage the life savings of about half of all Australians. The legislation states super “trustees”, the legally designated protectors of super, must legally exercise “care, skill and diligence” in overseeing those funds and to always act in the “best interests” of members, or face up to five years’ jail and “punitive” financial damages.

But while those wide-ranging laws apply penalties to members of the public who run self-managed super funds, they do not apply penalties to the trustees managing more than $1.2 trillion in super.

The loophole, evident via a reading of the Superannuation Industry (Supervision) Act, has been allowed to continue ­despite the federal government overhauling super laws in 2016, in a move it said would “enshrine the objective of legislation” into law.

Every federal government over the past 25 years has publicly boasted that the nation’s super system is secure and the envy of the world.

However, these investigations show that while there are many, descriptive and specific “criminal” and “civil” laws governing ­superannuation, the trustees of the bulk of the ­nation’s super cannot receive even a $10 fine for breaking the law.

But self-managed super fund trustees, who are in the vast ­majority of cases the owners of their super, can face up to five years’ jail, restitution of losses and even “punitive” costs for the wrongdoing.

Financial Services Minister Kelly O’Dwyer said the government had reforms before the Senate, introduced last September, but they had been “frustrated” and the law had not passed ­because of “lobbying against them by vested interests within the industry”.

“The Members Outcomes Package of reforms, currently ­before the Senate, includes a measure to extend the civil and criminal penalty rules in the Superannuation Industry (Supervision) Act 1993 to cover breaches by directors of their covenant ­duties,” a spokesman for Ms O’Dwyer said.

“From the time the Members Outcomes legislation receives royal assent, the court may make a civil penalty order against a ­director in breach of their trustee obligations and may issue them with a fine of up to 2000 penalty units.

“In addition, serious breaches of the directors’ duties (such as those involving intentional or fraudulent contraventions) will constitute a criminal offence punishable by up to five years’ imprisonment.”

A report in The Australian this week showed financial services giant IOOF, which manages $26 billion of the public’s super, has been accused by almost 100 of its own employees of fee gouging.

In a May 4 letter, almost 100 of the 150 financial advisers working for Bridges Financial Services, the biggest network of advisers ­responsible for funnelling the money into IOOF, accused the group’s management of “unfathomable” behaviour by attempting to increase the fees it charges its 350,000 member accounts.

In a letter to IOOF managing director Christopher Kelaher and IOOF chairman George Vernados, the group of financial planners said the gouging was “quite simply” a move to “increase revenue to IOOF”.

The group had told all investors, or their financial advisers, that it planned to introduce “exit” fees — making existing investors in super products less likely to leave those products, and raising more money for IOOF when they eventually did — and lift its fee for managing simple, risk-free, cash investments by 33 per cent, for no disclosed reason.

The Bridges planners said the moves by IOOF were particularly egregious given they occurred amid an active royal commission into financial services, which ­includes examining superannuation fund managers. Hearings into super will start on August 6.

Following the backlash by Bridges, IOOF told Bridges planners their clients would be exempt from several of the new fees.

Any person can become a government-certified financial adviser, with a “diploma of financial planning” requiring no exams and taking four days to complete.

People are not even required to have completed Year 10 of high school to complete that brief course, governed by the Australian Securities & Investments Commission, which consists of some multiple-choice questions and some “short-answer” questions, which can be completed online with no supervision.

The Australian revealed on Wednesday that the 340,000 member ­accounts in the IOOF Portfolio Service Superannuation umbrella, had earned an average annual return of just 2.1 per cent a year on their ­retirement savings in the 10 years to June 30, 2017.

The nationally recognised return on risk-free “cash” investments — based on the returns on simple short-term deposits paid by the nation’s big four banks and the amount the government pays in its guaranteed “bonds” it sells to investors — was 66 per cent higher over the past decade.

The returns on those 340,000 super member accounts was even less than the rate of inflation, meaning despite hundreds of thousands of investors paying between 9 per cent and 9.5 per cent of every pay packet in government mandated super, those nest eggs have actually lost money.

Both Mr Kelaher and Mr Vernados have repeatedly declined to comment when contacted by The Australian in recent days.

The most recent overhaul of superannuation laws passed the Senate in 2016.

“On 9 November 2016, the government introduced the Superannuation (Objective) Bill 2016, which will enshrine the ­objective of superannuation in legislation,” the government said at the time.

“It sets out a clear ­objective for superannuation: to provide ­income in retirement to substitute or supplement the Age Pension.”

The Coalition and major banks — and IOOF and AMP — fought against the royal commission into financial services.

The Australian

13 July 2018

Adam Creighton – Economics Editor

Super funds charged fees more than four times higher than similar funds in Canada, Europe and the US, with workers thousands of dollars worse off each year, the study says.

“If members’ contributions between 1997 and 2016 had been invested in a passively managed fund with typical expenses and allocations, they would now be valued between $700bn and $800bn larger,” University of NSW economist Nicholas Morris said. The total pool of superannuation assets, $2.6 trillion in March, would now be more than $3.3 trillion.

Declaring superannuation a “policy failure”, Professor Morris, a joint founder of the highly regarded Institute of Fiscal Studies in London, said high fees meant the retirement system in Australia had delivered income replacement rates that were barely above 40 per cent, compared with an average of 63 per cent across OECD countries.

“Twenty-six years after compulsory superannuation began, you have a system that delivers an income replacement rate for retirees that is among the lowest in the OECD, forces fund members to bear risks they are ill-equipped to manage, and provides significantly poorer returns on investment than could reasonably have been expected,” Professor Morris told The Australian.

The Keating government made superannuation compulsory in 1992. The compulsory rate is scheduled to rise from 9.5 to 12 per cent by 2025.

Professor Morris’s analysis follows a recent Productivity Commission report that revealed system-wide annual fees had surpassed $30bn a year. The landmark report found one in three super accounts was unintentional, draining almost $3bn a year in fees, and millions of workers were set to retire with $600,000 less in savings because of chronic underperformance.

The study avoided inter­national comparisons, but Professor Morris’s analysis of 256 large super funds around the world — comparing actual performance against benchmarks based on underlying investment allocations from 2004 to 2012 — showed Canadian and US funds, on average about 10 times as big as Australian funds, performed far better than local options.

Domestically, “retail” fund fees were twice as high as non-profit “industry” fund fees. The best performing funds were closed, in-house corporate and public-sector funds, managed for staff, including those for the Commonwealth and Reserve banks, Goldman Sachs and Telstra. The worst-performing fund was the Australian Christian Superannuation Fund.

“The greater the degree of separation between managers and beneficiaries, the worse the performance seems to be, partly because less attention is given to how the members fare, partly because there are more layers of cost,” Professor Morris said.

Funds open to the public exhibited costs three times those of closed funds.

“There are multiple regulators with insufficient responsibility for controlling overcharging and other rent-seeking behaviour, with no-one taking responsibility for the efficiency of the industry as a whole,” he added.

The Turnbull government in May announced it would cap management fees at 3 per cent of members’ balances, and make life-insurance policies “opt-in” only for members under 25.

The analysis also showed international funds that used low-cost, passive investment strategies beat the relevant benchmark by 0.28 per cent a year, while those that managed funds “actively” ­underperformed by 2.92 per cent.

Australian funds are beefing up their teams of active fund managers. Sun Super, which oversees $55bn, is reportedly set to lift the number of investment manager bankers from 29 to 50 by 2021.

After six years studying the super industry, Professor Morris launched a book in April warning other countries against adopting systems of compulsory saving — Management and Regulation of Pension Schemes: Australia — A Cautionary Tale.

He said the poor Australian performance also arose from poor choice of assets, driven by tax rules; unnecessary “churn” of assets, generating fees; and erosion of legal requirements for directors to act in members’ best interests.

Australian Financial Review

5 July 2018

John Wasiliev

The Australian

30 June 2018

James Kirby

Australia’s love affair with property might just mean a major reversal is going to hit the flourishing world of self-managed super funds as a new area of scandal looms in financial advice.

We know already that financial advice standards across the market are appalling and we also know that property prices are falling.

But it is only this week we found out that most new investors joining the SMSF sector are doing it to buy property.

Unfortunately, many of these investors are being lured into the area by unscrupulous advisers who have links with property companies.

An ASIC report says 90 per cent of financial advice given on opening SMSF funds is not compliant with the law. It also adds that one in five investors is at risk of what they politely describe as “financial detriment” through bad advice.

Let’s put all that another way: there is now evidence from the regulators that people are being lured into SMSFs by the worst sort of advisers in the market.

At its most appalling, the advisers are doing it to make themselves richer and the investors are left with their entire life savings in a single property investment that is probably third-grade.

It’s a recipe for disaster often among the very people who really would be better off having someone else manage their money.

But let’s make one thing clear — the problem here is not aspiring investors, it is the advisers.

It’s not that self-managed funds are a problem per se … or even that SMSFs can legally put all their eggs in one basket.

Rather, the problem building rapidly is due to two issues:

• Property returns have been so good for so long that investors believe it cannot be beaten as an asset choice. As ASIC explains, new investors see residential investments as “a safe bet”.
• SMSF member numbers have been growing apace for years, now that they have reached the one million mark it may be a natural plateau in a wider population of 25 million

SMSF funds really only started exploiting the rules, which allow them to borrow to buy property since 2009, when the banks began to create tailored products in the sector.

Though the rules are restrictive and the proportion of SMSF borrowing remains small, the attention paid to the area has been intense … and most of that attention has been negative.

In defence of property borrowing in SMSFs, perhaps the best argument is that SMSFs can already invest in everything from hedge funds to bitcoin, so why not the house next door?

But crucially these SMSF investors must be well advised … what is happening is the very opposite.

The SMSF association, which defends the right of investors to borrow for property, suggests advisers must be made to do a specialist SMSF course as part of their qualifications; this would be a useful start.

But the danger right now is that the enemies of SMSFs — and they include most of the big super funds, both retail and industry — will use this ASIC report to lobby for a total ban on geared super in SMSFs.

Big funds hate losing members to SMSFs: they argue that SMSFs need to be protected from themselves; this is the very same line of thinking that makes investors go solo and start SMSFs in the first place.

In his recent Financial System Inquiry, David Murray — who is now chairman of AMP — recommended that borrowing be banned from SMSFs.

The government accepted a range of Murray’s report recommendations but ignored his advice on borrowing in super.

Separately, in the recent Productivity Commission report on super, the issue of borrowing in SMSF funds was given an effective tick of approval with the commission finding no substantial concerns.

Any adviser who can add two and two together will know that an SMSF should be diversified. If they have property it should be a part of a portfolio along with shares, funds, alternatives and cash. If borrowings are made to buy the property the repayments have to be worked out carefully.

Perhaps not every SMSF aspirant knows this but the wider community of SMSF operators should not be penalised for it.

The SMSF sector is in a mature stage of growth — it has been pilloried throughout this past year by larger funds, it has been hampered continually by a range of governments, most recently by the Turnbull government with a huge crackdown on both contribution limits and the introduction of tax on pension income.

Once again it becomes clear the sector has few friends and property borrowing in SMSF is now in serious jeopardy with a damning report from a powerful government regulator.

In a stroke, ASIC has just handed the big super funds a weapon to push their case again in Canberra.

The crucial point is that borrowing for property in a SMSF is perfectly reasonable when done by the book — it is perfectly dreadful when done under the eye of a charlatan adviser in league with a property developer.