Gaps exposed in super, franking credits structure

The Australian

30 May 2019

Robert Gottliebsen – Business Columnist

Chris Bowen’s foolish plan to bash struggling retirees has highlighted significant gaps in our superannuation and franking credits structure.

Now is a very good time to tackle those issues for the benefit of all Australians.

Treasurer Josh Frydenberg is examining superannuation and I invite him to consider the issues highlighted by the Bowen mistake.

The first issue is the poor disclosure from most publicly-available funds. And the risks of class actions like that being mounted against the AMP would be lowered with better disclosure by all funds.

It’s time to impose on all publicly-available funds—both industry and retail – the same disclosure rules. The Coalition government keeps worrying about industry fund board structures, which hinders concentration on the main issues.

All superannuation funds hold their assets in trust for members who are entitled to know the details of where money is invested; who is managing it and at what cost; what commissions are being paid; whether members’ money is spent on promotion or sent to owners, plus an array of other matters.

The rules for all funds must be the same.

And this is particularly important because the franking credit morass aroused suspicions that there was a hidden story.

Every major superannuation fund (retail and industry) remained silent when they knew that what Chris Bowen was doing in allowing retirees in big superannuation funds to receive their cash franking credits while others would not, was simply wrong in every sense of the word.

Strangely, had one or two of the big funds spoken out they might have caused the ALP to modify their policies and therefore possibly win the election.

When people know that a political action is wrong and are silent it usually means that there is something to hide.

The unfair Bowen proposal confirmed that a new set of approaches is required for franking credits.

All franking credit entitlements should be irrevocably attached to the beneficial owner of the shares that generate that entitlement. Again it looks like there is a hidden agenda.

I suspect that banks and some big superannuation funds are playing naughty games with overseas holders of shares. Overseas holders are not entitled to franking credits but, at least on paper, sometimes “ownership” is transferred from an overseas entity to a superannuation fund or a bank with the real owner retaining the right to get their shares back after an extended period.

The benefits of the franking credit are shared in a side deal between the overseas beneficial owner and the institution, whose name appears to the register.

Making sure that franking credits are the entitlement of the person or body who is the real beneficial owner of the shares will stop those games.

I suspect when we put the microscope on various advice practices we may find bad things are happening. I hope that is not case but the royal commission never looked in this area, so we simply don’t know.

But we need to go further.

It is clear from the Bowen fiasco that the big funds have not separated out those of their members that are in pension mode and those that are in employment mode That’s why under the Bowen plan the retirees in industry and big retail funds could get their franking credits by sponging on the tax paid by others.

All superannuation funds should run their pension mode operation separate from their non- pension operation, so those sort of stunts can never be repeated.

Although people have a degree of choice in how their investments are structured in a big superannuation fund the strategies that apply to retirees are usually different to those of 20 and 30 year olds. The same rule should apply to self-managed funds.

The Senate rejected the government’s plan to increase the number of people who can be members of a self-managed fund from four to six. The ALP and the Greens traditionally have hated self-managed funds and the government did not work hard enough on the crossbenchers.

That issue needs to be readdressed by the new parliament. I would like to see the number of allowable members increased to eight.

The beneficial owners of the assets in self-managed funds are getting older and in many cases it will make sense to bring in family members.

Self-managed funds are huge in the retirement arena and there is no doubt their members played a big role in the government’s re-election.

I would hope that the ALP has learned the lesson, albeit the hard way, and will support the government in increasing the number of people who can be members.

If it has not learned then the issue is worth pressing with the crossbenchers, who will usually act in the national interest.

There is a place for industry retail and self-managed funds and the parliament should recognise this and not favour one sector over the other.