Category: Newspaper/Blog Articles/Hansard

Joseph Cheung (jcheung@dbalawyers.com.au), Lawyer and William Fettes (wfettes@dbalawyers.com.au), Senior Associate, DBA Lawyers

The total superannuation balance (‘TSB’) is one of the most important new concepts introduced as part of the major superannuation reforms that broadly came into effect on 1 July 2017. Many superannuation obligations and rights depend on a member’s TSB: broadly the total amount a person has in all Australian superannuation funds, including amounts in pension phase and accumulation phase. This article aims to highlight the main TSB milestones that individuals and advisers need to be aware of under the new super rules.

TSB milestone #1: $500,000

Eligibility for the five year carry forward of unused concessional contributions cap

Broadly, if an individual’s total superannuation balance just before the start of the relevant financial year (‘FY’) is less than $500,000, they may be able to access an increased concessional contributions (‘CCs’) cap where the individual has not fully utilised their CC cap for one or more of the previous five FYs. Further details can be found in s 291-20 of the Income Tax Assessment Act 1997 (Cth) (‘ITAA 1997’).

It should be note that the $500,000 figure is not subject to indexation.

TSB milestone #2: $1,000,000

Self managed superannuation fund (‘SMSF’) event-based reporting

Generally, SMSFs are not be required to report under the Australian Taxation Office’s (‘ATO’s’) transfer balance account report (‘TBAR’) regime on a compulsory basis until 1 July 2018. Though it should be borne in mind that some SMSFs may wish to commence voluntary reporting earlier than this date where members are subject to other TBAR transactions in respect of their APRA-regulated funds which have already commenced real-time reporting.

Under an ATO administrative concession, the TBAR reporting frequency that applies to SMSFs paying existing (ie, pre-1July 2017) retirement phase pensions depends on the TSB of the fund members. The reporting concession is as follows:

• SMSFs that only have members with a TSB of less than $1,000,000 report events at the same time that the SMSF lodges its annual return; or
• SMSFs that have a member or members with a TSB of $1,000,000 or more will be required to report events impacting their members’ TBA within 28 days after the end of the quarter in which the event occurs.

Similarly, for SMSFs commencing to pay retirement phase pensions on or after 1 July 2017, the fund’s reporting frequency depends on the above TSB milestones.

However, certain defined events (eg, an ATO directed commutation) must be reported sooner.

It should be noted that the $1,000,000 TSB threshold for TBAR is not subject to indexation, and an SMSF’s reporting frequency does not change once it has been locked in to a particular reporting cycle.

TSB milestone #3: $1,400,000 and TSB milestone #4: $1,500,000

Bring forward of an individual’s non-concessional contributions (‘NCCs’) cap

Individuals under age 65 who are considering triggering a bring forward of their NCCs should check that they satisfy the additional TSB eligibility criteria in s 292-85(3) of the ITAA 1997. Assuming the relevant eligibility criteria are satisfied, an individual’s TSB immediately before the start of the first year determines whether they will be able to ‘bring forward’ between two or three years’ worth of the annual NCCs cap. In order to ‘bring forward’ the maximum amount of three years’ worth of the annual NCCs cap, the difference between the general transfer balance cap (‘TBC’) and the individual’s TSB at the test time must exceed an amount equal to twice the annual NCCs cap.

For example, if an individual wishes to trigger a ‘bring forward’ period of three years starting from FY2018, the difference between the general TBC of $1,600,000 and the individual’s TSB must exceed an amount equal to twice the annual NCCs cap of $100,000. This means the individual’s TSB must be below $1,400,000. If the individual’s TSB at the test time exceeds $1,400,000 but remains below $1,500,000, the individual will only be able to trigger a ‘bring forward’ period of two years.

TSB milestone #3 and TSB milestone #4 are subject to indexation due to the general indexation rules that apply to the general TBC and annual NCCs cap.

TSB milestone #5: $1,600,000 (not subject to indexation)

Disregarded small fund assets

Effective from 1 July 2017, SMSFs (and small APRA funds) will be precluded from using the segregated method to claim except income in certain circumstances. Section 295-387 of the ITAA 1997 sets out the criteria for this limitation applying and it is known as the disregarded small fund assets rule. One criterion for the rule applying is that a small fund member has a TSB that exceeds $1,600,000 just before the start of the income year where the fund has at least one retirement phase member.

Broadly, one common scenario that would be caught by the disregarded small fund assets rule is where there is an SMSF paying a retirement phase pension to a member who has a TSB above $1,600,000 on 30 June. Under the rule, the fund would be required to apply the unsegregated method for calculating its exempt current pension income in the following income year.

It should be noted that this $1,600,000 threshold is not subject to indexation.

TSB milestone #6: $1,600,000 (subject to indexation)

Making an NCC without an excess

In order to have an NCCs cap greater than ‘Nil’ for an income year, an individual must not have a TSB equal to or exceeding the general TBC immediately before the start of the FY of the contribution. Accordingly, if an individual’s TSB immediately before the start of FY2018 equals or exceeds $1,600,000, then they cannot make any NCCs for FY2018 without triggering the excess NCC regime.

It should be noted that the $1,600,000 threshold is subject to indexation due to the general indexation rules that apply to the general TBC.

Offset for spouse contribution

Section 290-230 of the ITAA 1997 sets out the criteria for when an individual is entitled to a tax offset for making an NCC to a spouse’s nominated superannuation fund. Notably, an individual is not entitled to a tax offset for an income year if, immediately before the start of the FY of the contribution, their spouse’s TSB equals or exceeds the general TSB. For example, if an individual’s spouse’s TSB immediately before the start of FY2018 equals or exceeds $1,600,000, then the individual is not entitled to a tax offset for a contribution made to a superannuation fund for their spouse in FY2018.

It should be noted that the $1,600,000 threshold is subject to indexation due to the general indexation rules that apply to the general TBC.

Government co–contribution in respect of low income earners

Section 6 of the Superannuation (Government Co‑contribution for Low Income Earners) Act 2003 sets out the criteria for when an individual who makes NCCs to a superannuation fund may be eligible to receive a co-contribution from the Federal Government. One criterion is that immediately before the start of that FY, the individual’s TSB is less than the general TBC for that FY. For example, a co-contribution will be payable for the FY2018 income year if immediately before the start FY2018, the individual’s TSB is less than the general TBC for FY2018.

It should be noted that the $1,600,000 threshold is subject to indexation due to the general indexation rules that apply to the general TBC.

Conclusion

Under the new super rules, many fundamental superannuation rights and entitlements are affected by the TSB. Accordingly, individuals will need to carefully monitor their TSB as part of tax effective retirement planning.

Given that most of the TSB milestones discussed in this article are tested at the end of the prior FY, there may be opportunities for members with a TSB around a particular milestone to fall within the desired TSB threshold by virtue of prior FY planning (eg, by paying additional benefits).

This is a complex area of law, and where in doubt, expert advice should be obtained. Naturally, for advisers, the Australian Financial Services Licence under the Corporations Act 2001 (Cth) and tax advice obligations under the Tax Agent Services Act 2009 (Cth) need to be appropriately managed to ensure any advice provided is within the bounds of the law.

DBA Lawyers offers a range of consulting services in relation to superannuation fund members who need legal advice in relation to their TSB.

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

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

www.dbalawyers.com.au.

The Australian

16 May 2018

Simon Benson – National Affairs Editor | Sydney | @simonbenson

As Labor Treasury spokesman Chris Bowen prepared to outline today Labor’s plan to match the government’s early return to surplus and tackle the nation’s debt bomb, Scott Morrison accused the opposition of using older Australians to fund a spending splurge.

Treasury and parliamentary budget office ­estimates suggest that Labor’s tax hit from scrapping imputation credit refunds — a policy that will largely target self-managed super funds — will amount to a third of Labor’s new tax grab over the current forward estimates, to 2021-22.

The Treasury and PBO numbers, which have been disputed by the opposition, show the retiree tax raising $10.7bn over four-year budget forward estimates, working on a baseline year of 2018-19.

A policy to reverse the legis­lated company tax cuts for businesses with between $2 million and $50m in turnover, and not proceed with the remaining cuts proposed by the government, would raise $6.2bn in the four years to 2021-22, although Labor has not revealed yet what its election policy will be.

The re-imposition of the 2 per cent debt-and-deficit levy for high-income earners — taking the effective tax rate from 47 per cent to 49 per cent — would raise $5.25bn. And the winding back of negative gearing tax breaks for property investors would raise $1.35bn over the first four years. A total of $5.6bn would also be raised from superannuation contribution taxes and changes to family trusts.

Mr Morrison claimed that this meant retirees would be contributing more to Labor’s spending plan over the first three years of an ALP government than the reversal of company tax cuts, the winding back of negative gearing or tax rises for high-income earners.

Mr Bowen, in a National Press Club address today in response to last week’s federal budget, will pledge to return the budget to balance in the same year as the ­Coalition — 2019-20, a year ­earlier than originally forecast — while returning larger surpluses than the Coalition over the following years.

Labor’s costings would be overseen by an independent ­expert panel.

Mr Bowen will admit to preparing for a “backlash” over Labor’s tax policies, but say it is the right thing to do. “Australians probably didn’t know that you can get an income tax refund, even if you didn’t pay any income tax, and can get the tax paid by a company you own shares in repaid to you so that no net tax is paid. Removing a concession worth $6bn was, we knew, bound to cause a backlash,” he will say. “But we didn’t do these things for fun.”

Mr Bowen will add that Labor will go to the election achieving budget balance in the same year as the government while delivering bigger cumulative budget ­surpluses over the forward estimates, as well as “substantially” bigger ­surpluses over 10 years.

“The majority of savings raised from our revenue measures over the medium term will go towards budget repair and paying down debt,” Mr Bowen will say in his speech. What the eventual savings will be is yet unknown as Mr Bowen has not committed to whether Labor would repeal any or all of the legislated company tax cuts for small to medium-sized businesses. Over the medium term of 10 years, the government claims that Labor’s extra tax revenue would amount to $219bn. But Mr Morrison said extra taxes raised over the first three years by a Labor government would be $30bn.

“The biggest slug will be on retirees and pensioners, with more than $10bn coming from their plan to rip away their tax refunds they receive from their investments,” Mr Morrison said. “If elected Labor’s biggest tax in their first term will not be on multinationals and big banks, as they pretend, but on retirees and pensioners.”

Mr Bowen said Labor’s budget priorities would be to “deal with debt and deficit” and “fund policies we regard as important for economic growth”.

In his fifth post-budget reply address, Mr Bowen will say the majority of savings raised from Labor’s revenue measures over the medium term will go towards budget repair and paying down debt.

“But we are announcing today that the net result of those policies will be a better budget bottom line in the short term and bigger surpluses in the long term,” he will tell the National Press Club.

In an attack on the Turnbull government, Mr Bowen will declare that a surplus not reaching at least 1 per cent of GDP until 2026-27 would fail to “adequately protect Australia against the ­potential roiling seas of inter­national uncertainty”.

“The greatest failure of the government’s official ‘fiscal strategy’ has been the persistent watering down of its 2013 commitment to get to a surplus of at least 1 per cent of GDP by 2023-24,” Mr Bowen will say. “The government’s fiscal strategy was originally to reach a surplus of 1 per cent of GDP by 2023-24. This was then downgraded to a surplus of at least 1 per cent of GDP ‘as soon as possible’. Now, on the government’s current numbers, they still don’t get there for eight years, in 2026-27.”

Labor will also announce today that it will engage a “panel of ­expert and eminent Australians to review our costings and assure their efficacy”. The panel will include Bob Officer (a finance and accounting academic), Mike Keating (a former Department of ­Finance and Department of Prime Minister and Cabinet secretary) and James Mackenzie (businessman and fellow of the Institute of Chartered Accountants and Institute of Company Directors). They were engaged by Labor ahead of the 2016 election.

“The costings panel provide a final assessment and verification of our budget bottom line, over the forward estimates and the ­medium term,” Mr Bowen will say. “The panel will also assess the ­robustness of our costings and the assumptions that underpin them.”

Additional reporting: Joe Kelly

The Australian

9 May 2018

Glenda Korporaal

After three years of hitting people saving for their retirement, last night’s budget contained some measures to make their life a bit easier. It will also pave the way for the Turnbull government to go to the next election with a clear point of difference with Labor on super­annuation policy.

The government will encourage the Australian Taxation Office to find people’s lost super and send it to their active super account.

It claims the move will deliver almost $6 billion to about three million Australians in the first year it starts — from July 1, 2019.

The government will ban exit fees from superannuation accounts for people wanting to change accounts and stop super funds from forcing people under 25 from having to take out life insurance.

If they want to they can opt into life insurance, but they won’t be automatically put into life insurance policies by their super fund.

It is also capping the fees on super accounts with balances under $6000 at 3 per cent. This is estimated to save them around $570m in fees in the first year.

It is marginally improving life for retirees by giving them a one-year exemption from the work test, so that people aged between 65 and 74 can put more money into their super — provided their total super balance is below $300,000.

It is also increasing the amount age pensioners can earn without affecting their pension from $250 to $300 a fortnight.

For those who qualify, it is also expanding the pension loans scheme to people on the full pension and self-funded retirees.

It is very modest pickings, but after the big hits of the past few years when the assets tests for pensioners was made stricter and the super sector was hit with major tax changes, last night’s budget reflected the need to get the retirement saving sector back on side.

It also confirmed that the federal government planned to move the compulsory superannuation guarantee up from the current 9.5 per cent to 10 per cent in 2021-22, rising to 12 per cent by 2025.

Surprisingly, this was done with no fanfare last night, but contained in the budget papers.

While the government has worked hard to play down the impact of the big changes to super announced in the May 2016 budget which came into effect last year, the fact is that the sheer scope of the measures sent fear through the broader sector that each budget was a potential open season on people saving for their retirement.

The good news is that last night’s budget represents a cession of the rhetoric of the past few years that the super system, which had been boosted by the Howard/Costello government, was far too generous and needed to be reined in — and that people who were moving heaven and earth to put their savings into super were potentially rorting the system.

Given that the bulk of people affected by the changes were Liberal voters, who have long memories (and now short arms when it comes to donating to the party), last night’s budget was about shifting gears and painting the Liberal-National government as a friend of people saving for an independently funded retirement.

Financial Services Minister Kelly O’Dwyer is now assuring the industry that a Coalition government will go to the election promising no new taxes on superannuation.

While this sounds good, there is always the memory of 2013 when the Coalition also went to the election promising no new negative unexpected changes to superannuation without consultation — only to renege on that promise in spades.

Save Our Super founder Jack Hammond recently pointed out that there was some hypocrisy in the government painting itself as a friend of the super savers given the changes it announced.

That said, voters will have no option but to believe the Coalition on its policy on super, particularly those who may be hit by Labor’s promise to scrap tax refunds for dividend imputation — not to mention its promised removal of negative gearing on existing houses and a cut-back of capital gains tax benefits.

In his budget speech, Scott Morrison said the government would, “oppose unfair tax grabs on retirees and pensioners by enabling everyone who has invested in Australian companies that issue franked dividends to keep their tax refunds”.

Hardly a resounding election cry, but at least last night’s budget began a process of repositioning the Liberal-National government as one which is encouraging saving for retirement, which is well overdue.

The Australian

8 May 2018

Joe Kelly & Simon Benson

Bill Shorten has been caught out “exaggerating” the impact of his dividend imputation crackdown on the wealthy after new costings reveal fewer than five super funds in Australia claimed $2.5 million in excess franking credits in 2014-15.

The Opposition Leader has ­repeatedly justified his decision to scrap the refunding of excess franking credits — a move that will raise about $55 billion over 10 years — by saying the existing system allows some wealthy people to claim cash refunds of $2.5m while paying no income tax.

But according to fresh costings from the Parliamentary Budget Office requested by Liberal Democratic senator David Leyonhjelm, “less than five” self-managed super funds claimed more than $2.5m in refundable franking credits in 2014-15. The PBO conceded there could be just a single self-managed super fund in the country with the ­investment portfolio to cash in $2.5m in dividend tax credits, but was unable to publish the exact number due to “confidentiality reasons”.

The $2.5m figure used repeatedly by Mr Shorten was treated with open scepticism by key economists and leading super industry figures including Michael Rice, the chief executive of actuarial consultancy Rice Warner, as well as SMSF Association chairwoman Deborah Ralston.

The new PBO costings found the average excess franking credits claimed by the top percentile of fund balances was $83,000.

“These figures show that Labor was exaggerating the effect of its policy on wealthy individuals and underestimating its impact on middle and low-income individuals,” Senator Leyonhjelm said.

“It’s bad policy in principle but it’s also bad policy in practice, as these numbers show.’’

The Labor policy is one of several major revenue-raising measures estimated to haul more than $210bn into government coffers over the next decade if Mr Shorten can implement his agenda in the event he wins the next election.

Senator Leyonhjelm said his PBO costings appeared to indicate that those who benefited from the refunding of excess franking credits were not rich. The PBO figures show that, of the 201,439 self-managed super funds that claimed ­excess franking credits, only 33,761 had a balance of more than $2.4m. By contrast, more than 45,000 self-managed super funds claiming excess franking credits had a balance under $403,000.

“The notion that this is hitting the rich or the big end of town — there’s not that many of them,” Senator Leyonhjelm said. “The bulk of the load of this policy would land on people who don’t have a lot of money.”

However, the costings also ­appeared to support Labor’s arguments that 50 per cent of the benefit of refundable franking credits accrued to the top 10 per cent of SMSF balances, with about $1.36bn in tax credits claimed by the 33,761 biggest funds.

Labor has also rejected arguments that taxable income is a suitable benchmark to measure the wealth of individuals captured by its overhaul. It has instead pointed out that a couple with a $3.2 million superannuation balance with a family home and $200,000 in shares outside super could still draw a $130,000 income each year and pay no tax.

The PBO costings show that a little more than 400,000 people who claim excess franking credits pay a taxable income of less than $9500 while 16,300 have a taxable income of more than $109,600.

Labor initially said the shake-up would raise $59bn over a decade and $11.4bn over the forward estimates, but later excluded 320,000 people who received an Australian government pension or allowance through its “Pensioner Guarantee”.

The opposition said the guarantee would reduce forecast revenue over the decade from $59bn to $55.7bn, and $11.4bn to $10.7bn over the forward estimates.

The PBO costings bear out the Labor forecasts over the forward estimates.

Australian Financial Review

8 May 2018

Joanna Mather

Australians deserve to be free to save and invest unfettered by constant government tinkering with superannuation, says retiree Don McKenzie.

His overriding wish for this year’s budget was, therefore, that there be no more changes whatsoever.

“The government ought to legislate so that nobody can touch super,” he said.

“All of us, no matter how much money we’ve got, need to have the confidence that the super legislation will not be tampered with to the extent that individuals will be worse off.”

Mr McKenzie’s plea follows several years of upheaval in retirement income policy, including the 2016 decision to impose a $1.6 million limit on how much super could be transferred into an individual’s tax-free pension account.

The year before that, Treasurer Scott Morrison [sic] changed the pension asset test to make 172,000 pensioners better off by $30 a fortnight.

But another 91,000 retirees with assets of $823,000-plus lost their part pension.

A former partner of Ernst & Young and national chief executive of Gadens law firm, Mr McKenzie and his wife are retired and live in Breakfast Point in Sydney’s inner west.

While Mr McKenzie, who has a self-managed super fund, was displeased with the $1.6 million transfer balance cap, he is absolutely livid about Labor’s plan to make franking credits non-refundable.

“Paul Keating introduced the compulsory super scheme to encourage people to move away from the welfare state,” he said.

“Similarly, franking credits were meant to encourage people to move into ways of earning income through capital.

“That was a Labor government initiative aimed at strengthening people’s financial independence but Bill Shorten is trying to turn that all around and bring us back to a welfare state.”

Along with watching for health and infrastructure announcements, Mr McKenzie said he would be happy as long as the Coalition didn’t go near franking credits.

“We’re comfortable enough under the current system to earn somewhere around $150,000 a year between us,” he said.

“There is a good 50 per cent of our capital tied up in fully franked dividends so I can see $20,000 or $30,000 going out the door if Labor is elected.”

The Australian

8 May 2018

Monica Rule

Because of superannuation law changes that took effect from July 1 last year, it’s more important than ever for self-managed super fund trustees to get their ­affairs in order before the end of this financial year. I suggest these are the six most important steps for you to get your super into shape by June 30.

1. The capital-gains-tax relief
   SMSFs that were affected by the $1.6 million transfer balance cap and have transferred assets from either the retirement pension ­account, and-or the transition-to-retirement income stream ­account, to the accumulation ­account of their members, may reset the cost base of the assets and make an irrevocable capital-gains-tax relief election when lodging their 2016-2017 tax ­return.
   The Australian Taxation ­Office has allowed an extension to lodge the 2016-17 return by June 30 to claim the CGT relief.
2. Valuations
   SMSF asset valuations are very important as they affect how much money a member can have in their retirement pension account; whether a member can make further contributions; whether they have exceeded their in-house assets limit; and, whether the minimum pension payment has been made from their SMSF.An SMSF member is limited to the $1.6m transfer balance cap in their retirement pension account. Your total superannuation balance must have been less than $1.6m at June 30 last year in order to make non-concessional contributions for this financial year.
   An SMSF member’s total super balance must be less than $500,000 at June 30 this year to be eligible to carry forward any unused concessional contributions accumulated from July 1, 2018. An SMSF also must not exceed the in-house assets limit of 5 per cent of the total value of assets in the SMSF.For an SMSF to be able to claim the tax exemption on investment earnings from retirement pension assets, the minimum pension account must be paid from the SMSF. An SMSF with a member in the retirement pension phase with a total super balance of $1.6m at June 30, 2017 must use the unsegregated assets method to calculate the tax exemption on earnings from pension assets in this financial year.
3. Contributions
   This is a key area to watch since the contribution limits changed last year. The contributions limits are $25,000 a year for con­cessional contributions and $100,000 a year or $300,000 over three consecutive years (using the bring-forward provisions) for non-concessional contributions.
   SMSF members should check whether superannuation-guarantee contributions for the June 2017 quarter have been received by their SMSF in July 2017. If so, this contribution must be included in their concessional contribution cap for the 2017-18 financial year.Salary-sacrifice contributions are concessional contributions. Members should check their records before contributing more to avoid exceeding their concessional contributions cap. SMSF members need to ensure their contributions are received by their SMSF on or before June 30 this year in order to count towards the limit for the 2017-18 ­financial year, to avoid excess contributions tax, and to be able to claim the relevant tax ­deduction in the 2017-18 financial year.
4. Spouse contributions
   Spouse contributions must be received by an SMSF on or before 30 June for the member to claim the spouse-contribution tax offset. The maximum tax offset claimable is 18 per cent of non-concessional contributions of up to $3000. The spouse’s annual income must be $37,000 or less for the member to receive the full tax offset. The tax offset decreases as the spouse’s income exceeds $37,000 and cuts off when their income is $40,000 or more.
5. Contribution splitting
   The maximum amount that can be split for a financial year is 85 per cent of concessional contributions up to the concessional contributions cap. The split must be made in the financial year immediately after the one in which the contributions were made. This means a member can split concessional contributions made into their SMSF during the 2016-17 financial year in the 2017-18 financial year. Members can split contributions they have made in the current financial year only if their entire benefit is being withdrawn from their SMSF before June 30 this year as a rollover, lump-sum benefit or a combination of these.
6. The first-home super scheme
   SMSF members are now able to contribute $15,000 a year up to a total of $30,000 to their SMSF to fund a home deposit. These contributions, along with deemed earnings can be withdrawn for a deposit, with withdrawals taxed at a marginal tax rate plus the Medicare Levy with a 30 per cent tax offset. Any contributions made in the 2017-18 financial year will count towards what a person can take out from July 1 this year. The associated earnings will be calculated as though the contribution were made on July 1, 2017, even though it may have been made as late as next month.

It’s already mid-May: getting organised early will give you the peace of mind that your SMSF is operating lawfully and gives you the chance to take advantage of government incentives.

Monica Rule is an SMSF specialist and author.

www.monicarule.com.au

The Australian

24 April 2018

Glenda Korporaal

“You no longer deserve to be known as the member for Higgins, you should be known as the member for Hypocrisy.”

Superannuation lobby group Save Our Super has accused the Federal Revenue and Financial Services Minister Kelly O’Dwyer of hypocrisy with her comments that the Turnbull government would “deliver certainty and stability” for people saving for their retirement.

In an open letter to the minister, the member for the federal seat of Higgins where the organisation is based, Save Our Super says Ms O’Dwyer was a key player in delivering changes to superannuation which “delivered uncertainty and instability” to the system.

“Australians can no longer plan for their retirement,” the letter says.

The letter, being sent to members this week, is written by Save Our Super founders, retired Melbourne barrister Jack Hammond QC and former insurance broker John McMurrick.

The letter challenges comments made by Ms O’Dwyer in a recent speech and in a letter to her constituents which sought to contrast the policies of the Labor and Coalition parties on superannuation going into next year’s election.

In her letter, Ms O’Dwyer said the Liberal Party stood for Australians who worked hard to build a better future for themselves. “Our superannuation system must reward people who save for their future,” she wrote.

In her recent speech to a conference in Sydney, Ms O’Dwyer said the government’s superannuation policy “delivers certainty and stability so Australians can plan for their retirement in confidence”.

The Save Our Super group was set up in 2016 in the wake of the federal government’s changes to the superannuation system announced in the 2016 budget.

The changes, which involved new limits on the amount of money that can be put into superannuation as well as a $1.6 million cap on the amount of money that can go into a tax-free superannuation pension account, came into effect in July last year.

While the government said only a small percentage of people would be harmed by the changes, Save Our Super has been vocal critic of the measures, arguing they have affected a much broader range of people saving for retirement.

The organisation argues that any changes to the superannuation system should have been grandfathered.

The government argues that the budget changes were needed to make the system fairer and more sustainable.

The Australian

20 April 2018

Robert Gottleibsen

In the great franking credit debate someone has got their sums horribly wrong. Either Opposition Leader Bill Shorten and his shadow treasurer Chris Bowen are right and enormous sums are going to be raised or, alternatively, the financial planning and accounting industries, which are dealing with the people who must pay these taxes, are right and, apart from a particularly select vulnerable group, there are no vast sums to be raised.

We won’t know who is right until around May or June next year and by that time the election will be rapidly approaching.

I believe that Shorten and Bowen have made a horrendous mistake in their money-raising estimates and this represents the first big mistake that Shorten has made since he became opposition leader.

Worse still, Shorten and Bowen are promising vast expenditure and tax reductions on the basis of these fictitious money raisings. Most accountants, financial planners and myself believe that when Scott Morrison introduced his superannuation pension mode taxes and a $1.6 million pension mode tax-free cap last year he absorbed most of the franking credit bonanza.

If I am right then he is the Liberals’ best chance to achieve an improbable victory in the next election.

But I can’t emphasise too strongly that Chris Bowen honestly believes I am wrong and is adamant that he has taken into account the Turnbull government’s 2016 budget superannuation measures, including the $1.6 million pension mode balance cap.

Bowen says that Labor’s policies have been fully costed by the parliamentary budget office, which is independent and legally obligated to cost out policies, including the $1.6 million superannuation cap.

So for me to be right the budget office must be wrong.

But Treasury is notorious for making such mistakes and in this case there are no past figures available because the superannuation tax did not start until last July and it will not be until this time next year that we start to see the results.

So let’s look at how the investment communities are adjusting their strategies to make sure that there is no revenue bonanza for Bowen and Shorten. The essence of the Bowen proposal is that if an investor/superannuation fund receives franking credits and those franking credits can’t be offset against other taxes payable but rather come to the investor/superannuation fund via direct cash payment, then franking credits will be lost.

In other words as long as an investor/superannuation fund has sufficient other taxable income they can receive franking credits.

Starting with individuals, there is no doubt that a lot of people have big holdings in banks and other investments that carry full franking credits on the dividends.

If they have no other income those investors then will not get their franking credits. But most people with private investment portfolios have properties and other investments that produce non-franked taxable income and many are also working and that also provides taxable income. But there will be a group of people or companies without offsetting income and therefore they going to lose their franking credits under the Bowen plan. .

But Bowen can’t start the new regime until July 1, 2019 so there is the balance of this financial year and all of the next financial year to make sure portfolios are properly balanced for franking credits. Only the mugs will be caught and those that are currently receiving large franking credits into personal accounts are usually not mugs.

And then the next vulnerable group are ordinary non-pension mode superannuation funds whether they be industry, retail or self-managed. These are funds not in pension mode and therefore income is taxed at 15 per cent and again it is possible that some self-managed funds in this situation are stacked to the eyeballs with listed investment franking credit investments, but it is an imprudent investment strategy. Superannuation is about a balanced approach.

But once again those who have adopted this imprudent policy will certainly change it prior to July 2019.

Then we get to the most vulnerable people — those with superannuation funds in pension mode. The only figures we have available to us at this stage are those for the year ended June 30, 2017 and those figures show that there are substantial cash sums being paid in franking credits because the money in the pension mode funds was not taxable and so all the franking credits came as a direct credit.

But on July 1, 2017 a new tax system started and balances over $1.6 million are now taxed at 15 per cent — the same rate as non-pension mode superannuation funds. Accordingly exactly the same situation as non-pension mode applies. Again most superannuation funds will have a mix of assets and the non-franking credit assets and will produce taxable income which can offset the franking credits and enable them to be retained.

Yes, there will be some taxation raised by the Bowen measures but people are going to adjust their portfolios to ensure that the amount paid is small.

If people have pension mode superannuation assets under $1.6 million then they are a prime Bowen target because income from these assets is tax free so all franking credits are a separate payment and will be lost under the Bowen plan.

But the shadow treasurer has exempted those on government pensions.

We don’t know exactly how this will work but it seems those with assets that are low enough to entitle them to a government pension will receive franking credits, so in the roughest of terms it is only those people with assets between $800,000 and $1.6 million that will cop it in the neck.

Those with assets close to the government pension cut off point are planning to reduce those assets to protect the franking credits and obtain a part pension.

But there are still a lot of people in the asset bracket of $800,000 to $1.6 million but there will not be any massive lump payments and people will change their portfolios especially as banks have not been performers. It is this group of savers who saved to avoid being a burden to the public who Shorten and Bowen are attacking.

But even for these targeted people it looks like there could be a let-out. Bill Shorten said that those who have their money in retail and industry funds — the so-called APRA funds — will be protected. Now Chris Bowen is not as clear so this is an area of major doubt and we’ll have to wait closer to the election to have it clarified.

But if industry and retail funds are treated as one organisation rather than a series of individual members then they have substantial tax payments that easily offset franking credits. Those with vulnerable portfolios in self-managed funds will simply hand the management of their equity to industry or retail funds and their franking credits will be protected. If that’s the way it turns out then the real result of the Shorten-Bowen plan is an attack on self-managed funds.

This would be grossly unfair. As I understand it, the industry funds believe Shorten will deliver and are planning a massive campaign to destroy large segments of the self-managed super fund movement.

The accounting and financial planning people can’t see a major money pot — Morrison took it away last budget. But to be certain, we will have to wait for May-June 2019, as that is when the actual 2017-18 figures from superannuation funds will be available. And if there is no pot of money Shorten will have to recant on promises or borrow the money. Not a good way to start an election campaign.

Meanwhile this is an incredibly wonderful opportunity for the government because it creates uncertainty around pensions and has a hint of chaos.

If I was the government I would freeze all superannuation tax measures for five years and I would also be briefing my marketers to prepare a pension scare campaign that equates to the ALP’s Medicare scare campaign.

Both have no validity but like all good scare campaigns it doesn’t matter.

The Australian

3 May 2018

Scott Murdoch – Journalist | Sydney | @murdochsj

Mr Costello said Australia’s tax laws needed to become simpler and had become bogged down in changes which had made the system difficult to understand.

In an extraordinary attack on the superannuation system, Mr Costello also said politicians should be made to manage their own money and face the same penalties if mistakes are made.

“I would be in the top percentage of people when it comes to understanding the tax system and the financial management system but the complexity of this is unbelievable,” Mr Costello told the Macquarie Connections conference in Sydney.

“I would like to see MPs manage their own funds, and if they break the laws I’d like to send them to jail because that is what they are holding over everyone else with these laws. You might then get some simplicity into the system.”

The GST, he said, was introduced during his time as treasurer to simplify the Australian tax system but that goal had now been lost. He claimed federal parliamentarians would not be doing their own taxes each year because the system was too difficult to understand.

“I actually think, we have lost sight of this in Australia, a revenue system should be to firstly raise money and raise it in the least disadvantageous way for the economy and there has to be simplicity

“I tell you the transactional costs under a complex system can outweigh any revenue you get from it

“No MP would be filling in their own tax return, they can’t understand the system, they are just legislating it. That is a pretty good indication of the difficulty of the tax system as it stands at the moment.”

Mr Costello also took aim at the constant changes put in place by both the previous Labor governments and the current Coalition on superannuation taxes. He also said the current super rules made funds and workers too focused on accumulating funds rather than on how to manage the money after retirement.

“The taxation treatment of the drawdown changes every budget, it’s complicated, no one knows,” he said.

“I feel sorry for some of these financial advisers actually they are meant to tell people how to cope with all of this but no one can understand all the rules

“I wouldn’t be a financial adviser, it’s beyond my level of competence to figure out all the taxation and taxation treatments of superannuation. That is the big thing now, what we do in retirement phase, what the tax treatment.

“The one thing I would say to government is can you just give us some certainty on the rules and can you make them simple please.”

And the ALP’s linked attack on self-managed funds to the benefit of industry funds could also backfire.

The ALP’s franking credits proposal now is generating a widespread revision of retirement funding strategies across the nation and an examination of how both industry and retail funds currently distribute franking credits to their members whose money is in pension mode.

As part of this process, quietly and without fanfare, the government has opened the way for a new era of self-managed fund growth that will embrace families.

In particular it is offering self-managed funds in pension mode an option to protect their franking credits should the ALP win the next election (albeit, in the government’s view, an unlikely event).

There is little doubt that the royal commission into banking and finance will be gold for industry funds because they will be major beneficiaries at the expense of the retail funds that are run by banks, plus the AMP.

But the self-managed fund movement will also benefit.

It is ironic that the trigger for the royal commission was the Four Corners/Fairfax revelations about banking and insurance.

If we go back to the 1990s a similar ABC Four Corners program revealed incredible commission rackets in the life industry.

The National Mutual was revealed to be hiring used car salesmen and offering them two thirds of the first two years premium as commission. There was no disclosure and the unsuspecting clients did not know the level of the commissions.

The ALP’s John Dawkins legislated to force disclosure of commissions and that disclosure was the beginnings of the growth of self-managed funds.

While the National Mutual was highlighted, the high commission rackets were industry wide and when CBA bought Colonial and NAB bought MLC a decade after the sales commission scandals were revealed, the culture was still there and the banks inherited it. For the most part the big four banks had chief executives who had come up as bankers, not investment managers, and did not fully understand the impact of the deep-seated culture.

And the politicians (including the ALP when it was in power) believed the bank chiefs when they claimed the initial scandals were isolated incidents, not a cultural problem.

Unfortunately the politicians have not learned from their errors and so exactly the same thing is happening with the Australian Taxation Office small business scandals — it’s not a series of isolated incidents but rather a deep ATO cultural problem because too many people inside the ATO think all taxpayers are “liars and cheats”.

Given that private individuals and those with more than $1.6 million in pension mode superannuation funds can alter their investment strategies to protect their franking credits and those on government pensions are protected, the only people who are in danger are those with tax-free pension mode superannuation savings below the $1.6 million cap and above the government pension trigger point. Widows and widowers are particularly vulnerable.

I should emphasise that shadow treasurer Chris Bowen still genuinely believes he is right because he checked his sums with the budget office set up to undertake such tasks.

I do not know how the mistake was made but the government and treasury have done the detailed sums and there are only token amounts to be raised from people who will be hit hard.

Privately the government is asking itself whether to execute Shorten and Bowen now or wait until closer to the election when they have “spent” the non-existent money.

And the penny is dropping in some areas of government that not only can Bowen and Shorten be hit but there is money to be raised from banks plus retail and industry funds over franking credits which is much more desirable than taking money from widows.

Right now there is a racket taking place that no-one wants to touch. Under the franking credit rules shareholders who reside overseas are not entitled to franking credits. To get around this the overseas resident holders lend their shares to retail and industry funds at least 45 days before dividend time and/or borrow on the shares and register them in the name of the lender (usually a bank) so the bank gets the franking credit.

The deal is usually that the overseas shareholders’ “lost” franking credit is shared 50/50 between the overseas owners and the bank/ superannuation fund.

A very simple and highly remunerative move is to legislate so that only the Australian resident beneficial owners of the shares can benefit. The banks and big superannuation funds that are cleaning up will lose, as will the overseas shareholders.

There will be lots of screams and lots of money raised — a lot more than the ALP plan.

This situation underlines what is taking place among both industry and retail funds. For the most part the big superannuation funds see themselves as the one taxable unit but within that unit are members whose income is taxed at 15 per cent and those in pension mode and who have assets under $1.6 million who are tax-free.

In the industry fund movement there is an overall uniform benefit covering all members and then eligible pension mode members receive a credit that reflects both their tax-free status and their full tax-free franking credit entitlement. If these franking credit refunds were separated out from tax-free benefits they could easily be lost under the Shorten Bowen plan, but given they are not separated it enables the ALP to say that pension mode members of industry funds will not be affected.

The industry funds are adamant that the full tax benefit of franking credits to those in pension mode is distributed, albeit there is no disclosure. But do retail funds do the same thing?

It’s possible that in some big funds the full benefits of a tax free franking credit does not go to the pension mode beneficiaries who are entitled to it but rather the benefits are shared with to ordinary non-pension mode members to boost returns, or the benefit might even end up in the manager’s pocket.

In the meantime, self-managed funds are starting to look at playing the same game. All around Australia plans are now being prepared to bring children, particularly those with worthwhile superannuation balances, into the family self-managed funds. The children are not in pension mode so the income from their funds is taxed and that tax can enable the fund (and not an ALP government) to receive the benefit of the pension mode franking credits.

Now, of course, if the government acts to contain franking benefits to the beneficial owner then that scheme may not work, but industry fund members would be in the same boat. But there are other family benefits from bringing children into self-managed funds.

A self-managed fund is limited to four members, which means if there are three or four children it creates a problem. Enter the Minister for Revenue and Financial Services Kelly O’Dwyer. This week she announced that the number of permissible members in a self-managed fund would be raised from four to six, which will create greater flexibility for the new revolution.

Ageing parents (usually the male) have been reluctant to pass even partial control of the self-managed fund to their children but Shorten and Bowen have provided the trigger and this new era of self-managed funds will spread through the land.

There is a danger that a family split will make life complicated, but with intelligent planning that risk can be reduced.

It’s ironic that a plan that was aimed to raise money and attack self-managed funds will not raise big sums and will spark a new self-managed fund revolution.