Tag: save our super

Most superannuation nest eggs won’t save you from a pension

The Australian

25 July 2017

Judith Sloan

It won’t surprise anyone that I don’t regard myself as a victim — never have, never will. Can I also point out that one of the greatest
joys of my life has been bringing up children? I was lucky to be able to drive a balance between family and work.

So when I read the latest treatise bemoaning the shabby treatment of women in the workforce, I am generally uninclined to accept
the message or the recommendations at face value.

The recent topic has been superannuation and women. A study was conducted by think tank Per Capita and was funded by the
Australian Services Union. Note that the motto of Per Capita is Fighting Inequality in Australia. You get the drift.

It turns out that women’s superannuation balances are systematically lower than men’s, that the gap increases across the course of
working lives and that, at the age of 65, the average difference between men’s and women’s superannuation accounts is $70,000.

The median women’s balance immediately before retirement is less than $80,000. Mind you, the median men’s balance is only
$150,000. Anyone with these sorts of balances, and assuming a lack of other substantial assets (apart perhaps from a home), will
qualify for the full age pension and its associated benefits.

The authors of the study incorrectly describe the state of women’s superannuation as a wicked problem. A wicked problem is one
with inconsistent objectives and a lack of agreed information. This is simply not the case when it comes to women and

If there is a problem, it is the broader one related to the real purpose of compulsory superannuation. And this applies to both women
and men. For anyone on relatively low wages, all superannuation does is force them to accept reduced wages during their working
lives in exchange for possibly knocking off their full entitlement to the age pension. It’s a very bad deal.

Year after year these workers must forgo current consumption, which may now include buying a house but also help with the costs
of rearing children, meeting daily expenses and the occasional holiday, to be slightly better off when they retire. It really is a diabolic
trade-off for these workers, but from which they cannot escape.

So let’s return to the study. The reasons for women’s lower superannuation balances are obvious: on average, they earn less during
their working lives and they work less. This doesn’t mean that all women have low superannuation balances, just as this doesn’t
mean that all men have high superannuation balances.

Let’s take the working less bit first. Women are much likelier to work part time than men. In the most recent figures, women make
up 47 per cent of the workforce, a historical high. But almost half of women work part time, defined as those working 35 hours a
week or less, while only 18 per cent of men work part time.

Note, however, that the proportion of men who work part time has also been rising.

On this basis, it is hardly surprising that women’s superannuation balances are lower. They work fewer hours than men and hence
the wage on which their superannuation contribution (currently 9.5 per cent) is based is also lower.

But we shouldn’t forget that most women who work part time are doing so to balance their family and work responsibilities. And
many of these women quite rightly regard earnings and superannuation as a joint family product with both partners contributing to
the common pool.

It also should be noted that in the event of divorce, superannuation is regarded as an asset of the marriage to be divided up as part of
the financial settlement.

So what is the impact of the gender pay gap, an issue that attracts a lot of attention, most of it ill-informed?

At present, the difference between male and female earnings is about 16 per cent. It has fallen slightly as the mining investment
boom has come off and men have lost their high-paid jobs in that sector.

But the gross pay gap doesn’t tell us much about the explanations. After controlling for the many variables that affect earnings, such
as occupation, education, training, job tenure and the like, the pay gap narrows significantly, although it doesn’t reduce to zero.

But here’s the rub, at least for the Per Capita study and its sponsor, the Australian Services Union: the gender pay gap for low-paid
workers is explained entirely by wage-related characteristics. Moreover, the impact of minimum wages is to increase women’s
earnings relative to men’s.

So what should you make of the recommendations of this dubious study? In a word, they are ridiculous.

Let’s take the last one first — that the superannuation contribution be lifted immediately to 12 per cent. What the authors are saying
is that all workers must immediately forgo an additional 2.5 percentage points of their wage to augment their final superannuation
balance in several decades.

Then there are all sorts of silly suggestions for fleecing taxpayers some more to top up the superannuation balances that the authors
regard as inadequate.

But this makes no sense at all. After all, these low super balance workers will qualify for the full age pension, which in turn is fully
funded by taxpayers.

Why ask taxpayers to pay now when they will be forced to pay later?

Then there is the typical recommendation of these types of reports — add another government agency to the very long list of existing
agencies. In this case, the re-establishment of the largely pointless Office of the Status of Women is the suggestion.

For heaven’s sake, we already have the efficiency-sapping and senseless Workplace Gender Equality Agency whose work is of such
a poor standard that no one takes it seriously. But it doesn’t stop the agency from imposing more demands for information on
businesses every year.

In point of fact, there is a big issue here: what really is the justification for the system of compulsory superannuation? The central
rationale for superannuation was that it would replace the Age Pension and give workers a more comfortable retirement than might
have been the case.

Given the forecasts of the proportion of workers who will break free from the Age Pension during the next 40 years — it hardly
budges — the debate we should be having is whether we should ditch compulsory superannuation altogether.

New APRA guidance confirms retirement for members who reach 60 and cease one of two jobs

By Gary Chau (gchau@dbalawyers.com.au), Lawyer, and David Oon (doon@dbalawyers.com.au), Senior Associate, DBA Lawyers


The Australian Prudential Regulation Authority (‘APRA’) has just updated its Superannuation Prudential Practice Guide SPG 280 — Payment Standards (‘SPG’) in June 2017. Of interest in the SPG are APRA’s comments on the retirement definition in the Superannuation Industry (Supervision) Regulations 1994 (Cth) (‘SISR’), in particular it is useful to see APRA’s confirmation that a member that reaches 60 and has two or more employment arrangements will meet the definition of retirement if they ceases one of these employment arrangements. While APRA is not the regulator for SMSFs, its comments and interpretation of legislation are influential, including for the ATO.

With the introduction of the term ‘retirement phase’ pensions post 1 July 2017, it is now more important than ever to consider whether a member can start an account-based pension (‘ABP’) or convert their existing transition to retirement income stream (‘TRIS’) into an ABP. Only retirement phase pensions, such as ABPs, will be able to claim the pension exemption post 1 July 2017 on investment returns on assets used to support the pension. On the other hand, transition to retirement income streams (‘TRIS’) are not initially classed as retirement phase pensions and therefore cannot claim the pension exemption until they enter retirement phase once an appropriate condition of release is met and the trustee is notified (except for attaining age 65, where no notification is needed).

The definition of retirement

Retirement is a condition of release with a nil cashing restriction and satisfying this definition will allow members to commence an ABP.

The definition of retirement is found under reg 6.01 of the SISR, which provides that retirement can happen under either of the following two limbs:

Limb 1 — for a person who has reached their preservation age, the person is taken to be retired if:

  • an arrangement under which the person was gainfully employed has come to an end; and
  • the trustee is reasonably satisfied that the person intends never to again become gainfully employed, either on a full-time or a part-time basis; or

Limb 2 — for a person who has reached the age of 60, the person is taken to be retired if an arrangement under which the person was gainfully employed has come to an end, and either:

  • the person attained 60 on or before the ending of the employment; or
  • the trustee is reasonably satisfied that the person intends never to again become gainfully employed, either on a full-time or a part-time basis.

As you can see above, the definition of retirement is different for people who have reached preservation age but are less than 60 and for those who have attained the age of 60. The requirements under limb 1 require both criteria to be satisfied, whereas limb 2 only needs either of the listed criteria to be satisfied.

Part-time is defined to mean gainfully employed for at least 10 hours, and less than 30 hours, each week (reg 1.03(1) of the SISR).

Working 2 or more jobs

For limb 2 of the definition, those over 60 have some greater flexibility to meet the definition since that limb only requires that ‘an arrangement under which the member was gainfully employed has come to an end’ and that the person attained 60 before the ending of the employment. This will mean that a person who works two genuine jobs can be taken to retire if one job comes to an end after age 60, even if the other job continues. APRA’s SPG confirms this at para 22:

Where a member has reached the age of 60, is in two or more employment arrangements at the same time, and ceases one of these employment arrangements, this is a valid condition of release in respect of all preserved and restricted non-preserved benefits accumulated up until that time. However, it is APRA’s view that this will not change the character of any preserved or restricted non-preserved benefits that accrue after the condition of release has occurred. A member will not be able to cash any further benefits or investment earnings accrued from another existing employment arrangement, or any benefits or investment earnings from a new employment arrangement, until a further condition of release occurs.

What this means is that members could meet the definition of retirement when they cease one role even if the remaining job had the greater number of hours and a higher remuneration. For example, for a person who is over 60 with a full time job and a side job as a genuine self-employed Uber driver can meet the retirement definition by genuinely ceasing only the Uber job.

What is ‘gainful employment’?

It is not possible to meet the retirement definition by simply ceasing any job, work or task. Under both limbs, members must actually cease gainful employment.

The question then becomes, what does it mean to be gainfully employed? Gainfully employed is defined to mean employed or self-employed for gain or reward in any business, trade, profession, vocation, calling, occupation or employment (reg 1.03(1) of the SISR). This definition is narrower than many realise because both requirements ‘employment or self-employment’ and ‘for gain or reward’ are mandatory prerequisites.

To satisfy the definition, the test to determine whether or not there is employment is a multi-factor legal test based on things such as degree of control, who bears the risk of the venture, whether standard working hours exist, etc. Accordingly, not every job, work or task will be regarded as gainful employment. Take for example the following: a director of a small private company is unlikely to be gainfully employed by virtue of holding that role since a being a director alone is not necessarily employment and is not necessarily under any contract of service (see Beljan v Energo Form Act Pty Ltd [2013] ACTMC 21 [22]). On the other hand, a person who is genuinely driving for Uber, as a paid form of self-employment, is likely to satisfy the retirement definition if they were to cease this role.

*        *        *

This article is for general information only and should not be relied upon without first seeking advice from an appropriately qualified professional. The above does not constitute financial product advice. Financial product advice can only be obtained from a licenced financial adviser under the Corporations Act 2000 (Cth).

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.

© Copyright 2017 DBA LAWYERS

Transcript of the ABC’s 7.30 Report interview of Save Our Super’s Jack Hammond QC and John McMurrick on Kelly O’Dwyer

Click here to view the ABC’s 7.30 Report interview of Save Our Super’s Jack Hammond QC and John McMurrick on Kelly O’Dwyer.

Following is the transcript of the interview:

ANDREW PROBYN, REPORTER: A little over a week into maternity leave for her second child, Kelly O’Dwyer’s enemies have struck and they are not afraid to spell out what they want.

JACK HAMMOND QC, ‘SAVE OUR SUPER’ FOUNDER: Kelly O’Dwyer, in my view, doesn’t deserve to be our local member.

ANDREW PROBYN: One of Malcolm Turnbull’s five women Cabinet ministers, Ms O’Dwyer, is being targeted by a group of rich and powerful constituents, still furious at the use of the Government’s changes to superannuation. They say the timing of their intervention is incidental.

JACK HAMMOND QC: It’s a complete, if you pardon the pun, misconception. It has got nothing to do with her being on maternity leave or otherwise. They gave birth to an appalling policy which is affecting thousands of Australians and not only now but in the future.

They are the people who they should be thinking about.

ANDREW PROBYN: The Government argued that only the very rich were affected and with Labor support, the changes passed Parliament last November, including a 15 per cent tax on earnings for super nest eggs worth more than $1.6 million.

KELLY O’DWYER, FINANCIAL SERVICES MINISTER: Superannuation isn’t simply a revenue grab. It is about making sure the system is sustainable. It is about making sure that it is fair and, above all, it is about making sure that it is flexible and it is about making sure that we look after all Australians, not just a few.

ANDREW PROBYN: One of those angered is Jack Hammond, a barrister who lives in Ms O’Dwyer’s leafy suburban seat of Higgins who quickly moved to set up the ‘Save our Super’ group. It held a rally during the election campaign that attracted a modest crowd but included some backers with deep pockets.

JACK HAMMOND QC: What may have been lacked in numbers, certainly made up in vehemence and anger.

JOHN MCMURRICK, FORMER LIBERAL MEMBER: No, it’s very unfair. It affects a lot of people. And they are crucifying not only those who made a bob, they’re crucifying hundreds of other people.

ANDREW PROBYN: John McMurrick, a former insurance broker, now property developer bristles at suggestions his opposition is out of self-interest.

JOHN MCMURRICK: We have got a campaign to try and help people who have planned for 30 and 40 and 50 years and their whole plans are thrown into complete confusion.

ANDREW PROBYN: Mr McMurrick a big party donor, quit as a Liberal Party member last year. But the push to unseat Ms O’Dwyer got new potency when Tony Abbott’s former Chief of Staff Peta Credlin, was mentioned in dispatches as a potential replacement.

JACK HAMMOND QC: She speaks very plainly. She is a very intelligent person and thus far she hasn’t broken any promises to this electorate and the Australian people.

ANDREW PROBYN: Ms Credlin, no ally of Ms O’Dwyer, was slow to dispel the story, saying at first she had not been formally approached to run in Higgins.

But by Sunday when the optics of moving on a Cabinet minister on maternity leave sunk in, she made it clear.

PETA CREDLIN, TONY ABBOTT’S FORMER CHIEF OF STAFF: Regardless of whether it is Kelly O’Dwyer or anyone else, I don’t think challenging sitting members is a good look. It certainly is not something that is rewarded in the Liberal Party.

ANDREW PROBYN: As the minister with responsibility for superannuation, Kelly O’Dwyer is feeling the heat for a collective Cabinet decision made almost a year ago, but the undermining of her just days after giving birth is very ordinary indeed.

And that’s only half of it. Ms O’Dwyer is at the pinch-point in an increasingly toxic Victorian Liberal Party division.

She’s caught up in a factional war, involving state party president Michael Kroger. It’s a split that could have implications beyond Victoria.

STEPHEN MAYNE, FORMER LIBERAL STAFFER: Michael Kroger is a very controversial figure. He is the President. There was a failed coup against him recently involving Peter Reith as an alternative candidate, which was backed by all of the old Peter Costello supporters like Kelly O’Dwyer and was also backed by the Victorian state Liberal Leader Matthew Guy. And obviously there is a state election in Victoria next year. So, it is the Kroger versus the rest forces at work.

MICHAEL KROGER, VICTORIAN LIBERAL PRESIDENT: I don’t comment on Liberal Party preselections. That is a matter for branch members. We had this trouble recently in the Victorian party, where various MP’s were commenting on the presidency. And that goes down extremely badly with branch members.

ANDREW PROBYN: Former Howard government member Peter Reith suffered a stroke in late March, forcing his withdrawal from his challenge for the presidency. Kroger loyalists say that their man would have won anyway. Perhaps by as many as 150 out of 1150 votes. The Reith camp says that’s rubbish and Stephen Maine, a former Liberal staffer, agrees.

STEPHEN MAYNE: Matthew Guy, coming out publicly and endorsing Peter Reith was the decisive factor in that contest and many believe that Reith would have won because Kroger was on the nose.

ANDREW PROBYN: Liberal insiders say there is a real prospect of tit for tat preselection challenges between the Conservative and moderate wings of the Liberal Party and not just in Victoria.

Tony Abbott is facing a possible challenge in Warringah and his staunch ally Kevin Andrews will likely face a fight for his safe seat of Menzies. Ironically was once touted as a seat fit for Peta Credlin.

STEPHEN MAYNE: It might be a case of leave Tony Abbott alone or we will proceed with this challenge against Kelly O’Dwyer and it might be that the Abbott forces are looking for a bit of peace based on “you wouldn’t want a war, would you?”

ANDREW PROBYN: Not that any of this would particularly perturb any of those who have their own personal beef with the Liberals.

JACK HAMMOND QC: It is not rich people intervening to protect themselves. It’s people who have relied on promises of government over decades, who have done nothing more than obey the law and then on budget night without any forewarning, you are suddenly sprung with a completely changed policy.

The way in which it is framed is, this will only affect a few wealthy people. How puerile, really.

JOHN MCMURRICK: They will never raise any money until they get the trust of the people back. They have lost the trust of their constituents and they will find this out at the next election. Now we have heard from some politicians, the way it is looking, we will lose 20 seats at the next election. What a mess.

Is the golden age of super over?


4 July 2017

James Dunn

Superannuation contributions are regarded as a river of gold into Australia’s finance industry, but is that about to change as fund members retire and draw pensions from their fund?

By James Dunn

One of the features of the Australian superannuation system that most impresses foreign watchers – certainly during the global financial crisis (GFC), when virtually no-one else could raise capital – is the streams of cash that flow into it, mostly from the Superannuation Guarantee (SG), but also from voluntary contributions.

Over the past decade, Australians have contributed A$1.2 trillion into superannuation, of which 52 per cent has been due to the SG, says research firm Rainmaker Group.

In 2015-16 total contributions were A$137 billion – or A$375 million a day. SG contributions were A$77 billion, representing 57 per cent of the total.

That implies that voluntary contributions are also a major growth driver of the system. Rainmaker executive director of research and compliance Alex Dunnin says that while SG contributions are “rock-solid predictable”, voluntary contributions are also remarkably so, albeit slightly more volatile in the long-run trend.

“The two are growing at the same rate,” says Dunnin. “Over the past 20 years, while SG contributions have grown by 4.5 times, non-SG contributions have also grown by 4.5 times.”

It’s been a golden age of endless money for super funds which, along with their investment returns, has doubled the size of the nation’s superannuation kitty since 2008, to A$2.2 trillion.

When do superannuation’s rivers of gold start to dry up?

Shifting demographics will eventually start to threaten these rivers of gold. Sometime in the 2030s, an ageing population is expected to drive the super industry into the net drawdown phase – when more is taken out than goes in.

The system is still growing. Dunnin says Australian super funds paid out A$101 billion in benefits in 2015-16 compared with A$137 billion paid in, so they still had a net inflow of A$36 billion annually, or about A$100 million a day. He says that population factors indicate no projection of super contributions peaking for at least 20 years.

“The long-term projection over the next 20 years is for continued growth,” he says. “That is, the population is growing and the number of working-age Australians is going up too. Yes, the number of retirees is growing, but while they are expected to increase by 2.6 million between 2016 and 2036, the number of working-age Australians is expected to increase by 4.1 million.”

Fewer retirees are taking super lump sums

Besides population, the other major factor Dunnin sees is behavioural: the fact that the proportion of benefits being paid each year as income streams (pensions) rather than lump sums is rising fast, meaning more retirees are keeping more of their money in the system for longer.

“Ten years ago, 59 per cent of benefit payments were paid as lump sums. By 2016 this had plummeted to 36 per cent and by the end of the next decade, our modelling projects it will crash down to 22 per cent,” he says.

“By the end of the following decade it will be just 12 per cent. Interestingly enough, this shift is happening without any compulsory requirements regarding income streams.”

Professional Development: Super advice 2017: featuring a different topic each month, the Super advice webinar series delivers up-to-date knowledge on specialist areas of superannuation and financial planning.

Challenges for super funds in drawdown

Some super funds are already well and truly into net drawdown, because of their structure. This experience holds many lessons for the chief executives and investment heads at other funds, who will face the same circumstances eventually.

“The overriding consideration is that it is difficult to regain any money that we lose,” says John Livanas, chief executive officer at State Super NSW, whose four defined-benefit plans have been cash flow negative since 2004.

“If a positive cash flow fund makes a mistake, a pile of new contributions is coming in tomorrow, but if we make a mistake, the money is gone. It’s the opposite of compounding, it works against you.”

The level of investment skill required in the negative cash flow phase “goes up exponentially,” says Livanas. “Over the years, with positive cash flows, you’ve had a situation where all that a fund has to do is ‘put some growth assets in there and watch them grow’. You can’t do that in a negative cash flow environment.”

Instead, Livanas says State Super has modelled what it thinks the drawdowns are going to be, until the last member is left – which is 2085.

“We create assumptions around what the drawdown is likely to be, which reflects our view around longevity, inflation and drawdown requirements. On that, we overlay what is the type of investment return we’re probably going to need in order to achieve that. We then take that investment return and look to start getting it in particular ways – if volatility takes place in a certain way, even if you get that return, you won’t get the dollars,” he says.

The importance of asset allocation for super funds

Asset allocation becomes the most critical aspect of the investment process, he says. “That’s how you take the risks.”

State Super “actually has to think about running the portfolio like a hedge fund,” says Livanas, focusing on making money when it can, but not losing it when the market goes down.

“The key takeaway is that one can no longer depend on ‘time in the market’. You have to take money out of the market, you have to put in measures to protect the downside, and you have to tilt into the market if you think it’s rising,” he says.

Easy steps to maximising income in retirement

Australian Financial Review

10 July 2017

Ben Smythe

For a number of self-managed superannuation fund (SMSF) members drawing a private pension, July 1 signalled a need to revisit old budget spreadsheets and work out how best to fund ongoing living expenses.

With a $1.6 million cap on a tax-free super pension, some might find that their pension income falls from last year’s levels and they will need to consider assets in an accumulation account or in their personal name to make up the shortfall.

It is important that members revisit any pre-existing automatic pension payments now as they may no longer wish to keep drawing the same amount. Given that many SMSF pensions will have been reduced to meet the $1.6 million pension limit, the pension minimum will also need to be reduced.

To fund any income shortfall from the tax-free pension, there are three main options. Retirees can draw a higher amount from their super pension, take lump sums from the accumulation account or use personal assets – or a combination of all three.

Given the assets that remain in a super pension remain tax-free and the $1.6 million balance transfer cap is allowed to increase with earnings, it would make sense to wind back the minimum pension payment where possible in an effort to preserve as much capital as possible.

This will particularly be the case if the majority of the “tax-free member component” is sitting in the pension account. This is important because when a pension is in place, the tax-free and taxable components are fixed for the life of the pension. Regardless of whether the value of the pension rises or falls, the tax-free and taxable components remain the same.

This is not the case with an accumulation balance, where earnings increase the taxable component, and by implication will reduce any existing tax-free component.

The benefit of maintaining as high a tax-free component as possible is that it will reduce the tax bill on a death benefit bequeathed to an adult child. It will also possibly provide some protection against regulatory risk, which is obviously prevalent when it comes to super in Australia.

Where retirees are looking to draw the minimum from their SMSF pension, should they make up any cash-flow shortfall from their accumulation account or personal assets?

This will come down to tax, assuming that the superannuant has reached preservation age and has full access to their super savings.

In their personal name, savers can retain investable assets without paying tax up to a certain threshold – currently $18,200 per person. When franking credits are added, this could be a reasonable asset base depending on the income return.

For most people, once they withdraw money from super they can’t get it back in unless they meet the so-called work test if they are over the age of 65.

The combination of only being able to transfer $1.6 million into a private pension and the rise in minimum drawdown rates with age, means the reality is that a number of SMSF members will start to build a reasonable asset base in their personal name.

But if retirees are generating more than the minimum income threshold and so are paying tax in their own name, it would make sense to run down these assets before withdrawing money from a super accumulation balance.

Clearly a myriad of issues are emerging from the super changes that came into place on July 1. Rejigging portfolios in order to meet ongoing living expense in retirement is more than likely not an issue that many SMSF members have considered. Yet!

Ben Smythe is the managing director of Smythe Financial Management

Government push for income retirement products mired in division

Australian Financial Review

14 July 2017

Alice Uribe

The idea behind it is simple: Australia needs a way to ensure retirees do not outlive their savings. The solution sounds simple too: Create a suite of products that can provide a minimal additional level of income or a guaranteed level of income, with the expectation that it will stay constant (in real terms) for life.

But the path to creating the federal government’s Comprehensive Income Products for Retirement regime (also known as MyRetirement) is proving anything but smooth. Many believe what the government has come up with is at best unworkable and ineffective, and at worst unnecessary .

The peak body for the superannuation industry, the Association of Superannuation Funds of Australia, says in its 27-page submission to the inquiry into CIPRs that the framework “as currently designed … is neither necessary nor sufficient to achieve its stated objectives”.

KMPG’s superannuation director Katrina Bacon is blunt. She doesn’t believe many retirees will embrace the annuity-style products the regime envisages.

“I believe the launch of retirement products will continue to be a slow burn. From the individual’s point
of view, the framework does little to address the impediments to members taking them up,” she says.

Private pension
With the majority of super funds’ memberships soon to stop working, a so-called private pension product could well become their most important product offering.

This move towards the CIPRS framework stems from people’s uncertainty over how to make their retirement funds last across an impossible-to -predict lifespan.

Statistics show that 50 per cent of males currently aged 65 will die before 85, while 50 per cent will live longer and many will hit the ripe old age of 100.

“Because of the uncertainty, many retirees scrimp and save, and live on the minimum drawdown from their superannuation assets, driven by the fear of running out. As a consequence their lifestyle in retirement is curtailed and bequests are high,” Bacon says.

Those who are well-off can draw down the minimum amount from their super pension, keeping it in a tax-free environment.

“But for the population in between – who have a reasonable amount of super savings that can usefully supplement the age-pension and non-super assets – the challenge is how to spread this amount over retirement,” she says.

Super funds began thinking about the particular issues faced by retirees as far back as 2009, with ING becoming the first to market with a product that provided a guaranteed income for life. But these products have received a mixed reaction because of their cost and the challenge of explaining them.

Default offering
“The importance of this issue has increased as the number of retirees has grown. The concept of a MySuper-style default offering in retirement was contemplated as part of the Stronger Super reforms but was not implemented,” says Bacon.

“It was raised again as a recommendation of the 2014 Financial System Inquiry, eventually leading to the government’s release of the CIPRs framework for industry consultation.”

Treasury manager, retirement income policy division, Darren Kennedy told a Financial Services Council forum in May that the CIPRs framework aims to balance flexibility and risk by combining products like an annuity and an account-based pension.

Kennedy says the CIPRs framework is not intended to compel retirees to take up a certain retirement income product, to encourage annuities, to eliminate bequests for super or replace the need for financial advice.

Many [SMSF] strategies are based on the proportioning rule

By Gary Chau (gchau@dbalawyers.com.au), Lawyer, and Daniel Butler (dbutler@dbalawyers.com.au), Director, DBA Lawyers


We have had numerous queries about the proportioning rule over recent times. A common query is how does the proportioning rule apply and how do you calculate the tax free and taxable components in a superannuation benefit. This article is to assist you understand the fundamentals of this rule.

As a starting point, think of the proportioning rule as a sort of integrity measure that prevents the ‘cherry picking’ of the tax free and taxable components when a payment is made from superannuation. At its core, the proportioning rule provides that the tax free and taxable components of a benefit are taken to be paid in the same proportion as the tax free and taxable components of the member’s interest from which the benefit came (s 307-125(2) of the Income Tax Assessment Act 1997 (Cth) (‘ITAA 1997’)).

Terminology — key definitions

To be able to fully understand the proportioning rule, you first need to know the meaning of the following terms that are used in s 307-125 of the ITAA 1997: ‘superannuation income stream’, ‘superannuation interest’, ‘superannuation benefit’, ‘tax free component’ and ‘taxable component’.

Please note these terms can have different meanings in other legislation. We have primarily focused on the definitions of the terms used in s 307-125 of the ITAA 1997 from a taxation perspective and where relevant, we will also discuss each term’s meaning in superannuation law.

Superannuation income stream

Broadly, the term ‘superannuation income stream’ in the ITAA 1997 means ‘a pension for the purposes of the Superannuation Industry (Supervision) Act 1993 (Cth) (‘SISA’) in accordance with subregulation 1.06(1) of the Superannuation Industry (Supervision) Regulations 1994 (Cth) (‘SISR’)’. For ease of reference, we will use the term pension under the SISA to also refer to ‘superannuation income streams’.

Superannuation interest

The term ‘superannuation interest’ is a tax concept in the ITAA 1997 and essentially refers to either a member’s accumulation or pension interests. More technically, the ITAA 1997 provides that ‘every amount, benefit or entitlement that a member holds in a self-managed superannuation fund is to be treated as 1 superannuation interest in the superannuation fund’ (reg 307‑200.02 of the Income Tax Assessment Regulations 1997 (Cth) (‘ITAR’)). For reference, most SMSF members only have one interest in an SMSF, ie, their accumulation interest. However, this definition can get tricky when you consider the superannuation definition. For instance, the SISR provides that an amount that supports a pension is treated as a separate superannuation interest — meaning each pension gives rise to a separate superannuation interest. Another way to explain it is as follows, each SMSF member will have one interest per pension and one accumulation interest.

Superannuation benefit

The term ‘superannuation benefit’ means a payment from a superannuation fund to a member (eg, broadly this refers to payments from a superannuation fund to the member in the form of a lump sum or pension payments) (s 307‑5 of the ITAA 1997).

Generally, each superannuation interest of a member in a superannuation fund consists of the ‘tax free’ and ‘taxable’ components (although in some cases, the proportioning rules do not apply where one component may be nil and the other 100%).

Tax free component

The ‘tax free component’ includes the contributions segment and the crystallised segment. The contributions segment generally includes all contributions made after 30 June 2007 that have not been, and will not be, included in your fund’s assessable income. The contributions segment is made up of what is commonly known as non‑concessional contributions (and also includes the CGT exempt component, superannuation co-contribution benefits, and contribution splitting benefits). Whereas, the crystallised segment broadly includes numerous tax free components that existed prior to 30 June 2007 and are becoming increasingly uncommon.

Taxable component

The ‘taxable component’ is broadly the total value of the member’s superannution interest less the value of the tax free component. Contributions that would form part of the taxable component are generally amounts included in the assessable income of the fund. Broadly, the taxable component consists of concessional contributions and earnings and capital appreciation from investments in the fund.

When do you calculate the tax free and taxable components?

The value of the superannuation interest and the amount of tax free and taxable components of the member’s interest is determined as follows:

  1. Determine whether the benefit is a lump sum or a pension.
  2. Work out the total value of the superannuation interest and the proportion of tax free and taxable components as at the applicable time, which means:
  3. if the benefit is a lump sum — just before the benefit is paid; or
  4. if the benefit is a pension — on the date the pension commences. (In other words, you lock in the proportion of the tax free and taxable components on the date the pension commences, and future growth and earnings are shared proportionally between these components.)
  5. Apply the same proportions to the amount of benefit paid (this part is the essence of the proportioning rule).

Consequences of the proportioning rule

Proportioning rule when a pension is commenced

In an accumulation interest, the tax free component is normally comprised of a static amount (ie, the crystallised segment and the contributions segment). Whereas, the taxable component can change every day as the investments supporting the superannuation interest fluctuate with investment markets and earnings (or losses) accrue in some cases on a daily basis.

However, when a pension is commenced with a certain proportion of a tax free component and the pension assets increase over time, the tax free component will effectively grow. This is because at the time of paying pension benefits, the proportioning rule will use the same proportion of tax free component that was locked in at the commencement of that pension.

To illustrate how the proportioning rule works, in practice, in respect of pensions, look at the following example:

In January 2017, Christopher is 66 years old, still working and is a member of an SMSF. In his SMSF, Christopher’s superannuation interest consists of a tax free component of $300,000 and a taxable component of $200,000. His total superannuation balance is $500,000. This means the proportion of his superannuation interest that consists of the tax free component is 60% and the taxable component is 40%.

Christopher commences an account-based pension with just $250,000 of his total superannuation interest. At the commencement of this pension, the tax free component is $150,000 (or 60%) and the taxable component is $100,000 (or 40%) since his total superannuation interest before commencing the pension was 60% tax free component and 40% taxable component.

If the value of the assets supporting the pension were to rise, the percentages representing the tax free and taxable components do not change. Thus if Christopher’s pension balance, which started at $250,000, were to rise to $400,000 after three years due to his savvy investment decisions, his tax free and taxable components would retain the same proportion as at the pension’s commencement and will be as follows: a tax free component of $240,000 (or 60%) and a taxable component of $160,000 (or 40%).

Of course, if the value of the assets supporting the pension were to fall to say $100,000, then the proportion of the tax free and taxable components will still remain the same as at commencement (ie, $60,000 tax free and $40,000 taxable).

Accordingly, the following general rules should be noted:

  • Where assets are going to increase in value, the tax free component is maximised by commencing a pension sooner rather than later (locking in the tax free component to grow proportionately).
  • Where assets are going to decrease in value, the tax free component is maximised by commencing a pension later rather than sooner (allowing the decrease in assets to erode the taxable component).

Proportioning rule with an accumulation interest

To illustrate further the above general rules about the proportioning rule, consider the following:

Again, same facts as above, in January 2017, Christopher is 66 years old, is working and is a member of an SMSF. In his SMSF, Christopher’s superannuation interest consists of a tax free component of $300,000 and a taxable component of $200,000. His total superannuation balance is $500,000. This means the percentages representing the proportion of his superannuation interest that consists of 60% tax free component and 40% taxable component.

Let’s focus on his accumulation interest this time. Recall, Christopher commenced his pension with $250,000 of his total superannuation interest, he therefore has $250,000 remaining in his accumulation interest. That $250,000 in accumulation would comprise of a tax free component of $150,000 (or 60%) and the taxable component is $100,000 (or 40%). Like his pension interest, the value of his accumulation interest rises to $400,000 after three years due to his savvy investment decisions. Unlike his pension interest, his tax free component remains static and the proportion of his taxable component increases. Christopher’s tax free and taxable components in respect of his accumulation interest is now as follows: a tax free component of $150,000 (or 37.5%) and a taxable component of $250,000 (or 62.5%).

As the above example shows, there is no change to the tax free component if investments in the accumulation interest increase in value. Hence, the decision to commence a pension with some or all of a member’s benefits at the right time can make a significant difference to a member’s interest over the course of time.


A sound understanding of the proportioning rule is important as it is forms the basis of many strategies that leverage off it. For example, where there is a significant tax free component, the pension should generally be commenced as soon as practicable for a member where the fund expects to see some growth in the value of its assets. Further, when a member is contributing or rolling back a pension into accumulation, stay alert to the effect on what will happen to the tax free and taxable components — since these two components cannot be separated to maximise each client’s position once these amounts are mixed together.

*        *        *

This article is for general information only and should not be relied upon without first seeking advice from an appropriately qualified professional. The above does not constitute financial product advice. Financial product advice can only be obtained from a licenced financial adviser under the Corporations Act 2000 (Cth).

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.

© Copyright 2017 DBA LAWYERS

Retirees ‘punished’ for saving more

The Australian

30 June 2017

Glenda Korporaal – Associate Editor (Business) Sydney

The combination of the government’s cuts to age pension qualifications and tighter super-annuation rules this year will mean a couple can be better off ­financially with only $400,000 in super than with $1 million in ­savings, according to a paper ­produced this week by superannuation experts.

The paper, produced by Melbourne QC Jack Hammond, founder of lobby group Save Our Super, and former Treasury official Terrence O’Brien, argues that the combination of the changes to super and age pension eligibility, which come into effect this year produces a “retirement and ­income savings trap”.

The combined impact of the changes has been described as “Retirementgate” by SuperGuide superannuation commentator Trish Power.

The Hammond-O’Brien paper shows that a home-owning couple with $400,000 in super, when combined with the aged pension, can earn more than a couple with $800,000 to $1 million in super whose assets mean they don’t qualify for the pension.

The paper, produced for SuperGuide, argues that the retirement savings “sweet spot” is now $400,000 for a home-owning couple. With $400,000 in super, the couple would be eligible to ­receive 94 per cent of the aged pension, delivering them a total income of $52,395 a year.

But as the couple’s assets rise, the pension tapers off and then cuts out altogether under lower rates that took effect from this January.

“Under the new rules, regardless of whether you saved $600,000 or $800,000 or even $1m, you cannot secure more (in income) than what you secure with $400,000, until you have at less $1,050,000 in super,” Ms Power says in an analysis of the paper this week.

At this level, the homeowning couple would be relying solely on their savings from super with no eligibility for the aged pension.

“Financially, it is better to have $400,000 in super than $600,000, or even $1m in super, due to the harsh effect of the aged pension assets test,” Power says.

“Doubling the effect of the age pension taper rate from January 1 this year means Australian couples are effectively taxed 150 per cent for lifetime super savings between $400,000 and $800,000.”

The paper by Hammond and O’Brien, which is now on the Save Our Super website, is titled: “A ­retirement income and savings trap caused by the Coalition’s 2017 superannuation and aged pension changes.

It argues that, as a result of the lower superannuation contribution caps that come into effect from July 1 on Saturday, from a maximum of $35,000 to $25,000 a year, it would take 26 years for a person to overcome the “savings trap” to take their superannuation savings up from $400,000 to more than $1,050,000.

Ms Power calls the impact of the combined changes “Retirementgate” and predicts it will lead to a “stampede” by retirees to spend their savings on cruises and other holidays and in renovating their home to reduce their savings to make sure they qualify for the pension.

“Australia’s retirees have been conned and are now being ­punished for saving for their ­retirement,” she says.

The stricter pension asset test rules were announced by the ­Coalition government in the 2015 budget and came into effect in January this year.

This was followed by changes to superannuation policy announced in the May 2016 budget, which come into effect from this weekend.

‘Absolutely bizarre’: Government provides incentive to stop working

The Australian

28 June 2017

Robert Gottleibsen

It sounds incredible, but the government is providing a carrot to encourage people to stop working once they reach their 60s or late 50s. And then when they reach 65 the government will provide an incentive to encourage them to rejoin the work force. This is, of course, absolutely bizarre and not what the politicians had in mind.

I emphasise that the incentives are not big enough to cause an enormous rush of people aged between 60 and 65 to leave the workforce and rejoin when they reach 65. But I know of a number of people with large superannuation balances aged in their 60s who are now planning to do just that — leave the workforce and return once they reach 65.

When governments play around with pensions and superannuation it can have unintended and potentially damaging consequences for the society.

The latest superannuation changes will come into effect on July 1 so they concentrate everyone’s mind. The superannuation changes have been extensive and, perhaps understandably, the Australian tax office communications with accounting firms has often been complex.

Many accountants have spent hours trying to work out what it all means to their clients’ individual situations.

A number are now telling their clients that the rules whereby a person has a current entitlement to go into ‘transition to retirement’ pension mode have been changed more extensively than first thought (these transition to pension mode age qualifications depend on birth dates and can apply to people in their late 50s but certainly apply when a person reaches 60).

Currently a person can ask their super fund to put their entitlement into transition to retirement pension mode and therefore they must pay a minimum tax-free pension. But there is no tax to the superannuation income. They can continue to work so their personal income comprises superannuation pension and work income. Under the new rules if you are aged, say 61, you can still go into transition to retirement pension mode and draw that pension from tax-free superannuation income. There is a $1.6 million limit to the assets that can be used as applies to all superannuation. BUT in most circumstances it is very dangerous to be employed and gain work income because then your superannuation income is taxed at 15 per cent. This represents a clear incentive not to work in the years leading up to aged 65.

Once you reach 65 you are able to allocate up to $1.6 million into a tax-free superannuation pension account and you are also able to work at the same time. The tax-free status of your $1.6 million is not affected by the fact that you are working. So over 65 there is a clear incentive to work.

For a lot of people who are aged between 60 and 65 (and often the late 50s) and who want to stop working, the fact that they can gain tax free superannuation income up to the asset limit $1.6 million limit by not working will be attractive. In simple terms: Don’t work and have tax free superannuation or alternatively work and pay the superannuation tax.

For people with relatively small sums in superannuation it really won’t be an issue but for those with larger sums it will certainly become an issue and will cause many to leave the workforce. Already accountants are looking at ways you might be able to gain some working arrangement and still be able to get a superannuation pension from tax-free funds.

I might add that people aged between 60 and 65 can still take money out of their superannuation in the pension mode fashion — the difference is that as long as they work they must pay the 15 per cent superannuation income tax.

I can understand why the Australian tax office has structured the superannuation this way. They want to gain as much revenue from the 15 per cent tax as possible. But we have created a very strange situation and one that is not good for the community. Unfortunately that’s the way of governments in these times.

An even better example of poor policy is the aged pension gymnastics where people who have found themselves with assets in the vicinity of $400,000 and $800,000 are rewarded at 7.8 per cent when they spend their savings. Newspapers are absolutely studded with cruise advertisements to help people to reduce their assets and gain increased aged pensions. I don’t think the superannuation situation will be as dramatic but it shows that in Canberra they don’t understand how important to society it is to have people working in their later years. If they give up work in their 60s it is highly likely they will not return at 65. And they are more likely to end up on the government pension.

The current rules were established because the politicians of the day understood how important longer working would be for society. Someone needs to explain to the people in Canberra what happens in the real superannuation and pension world.

Investors are pumping more funds into super. But is that wise?


16 June 2017

Robert Gottliebsen

This weekend I want to take you back to June 2006, which is Australia’s last experience of a rush to thrust money into superannuation before the rules changed. It is worth recalling what happened in the subsequent months as a note of caution.

And we can also learn from the adventures of Lachlan Murdoch and James Packer in their investments in the Ten Network, showing how it can be very dangerous for small investors when major players are pursuing big strategic objectives.

I remember 2006-07 very well, when I was involved in a website start-up and had invested in the project. In the years leading up to 2006-07, the rules for putting money into superannuation were very flexible and you could invest very large sums. But the then Treasurer Peter Costello wanted to restrict superannuation investment – tax paid or so called non-concessional contributions – to $150,000 a year. And, as a bonus, he allowed investors in the nine months to June 30, 2007 to invest $1 million each on a tax-paid or non-concessional basis. For a couple, that meant $2 million.

Lots of people could access $1 million, and a great many borrowed money on their house to take the opportunity to invest in superannuation which would be tax free for those in pension mode.

I don’t think we have ever seen such a rush of money into superannuation in a short period of time, and it so happened that at that very time world stock markets were surging (the Dow reached a then peak of 14,000 in July 2007) and Australia hit highs that have not been reached since.

And so, given we were in a boom, a large amount of that superannuation money went straight into the stock market around June 30, 2007. Looking back there were signs that the US subprime market was in a very dangerous phase. The balloon went up in August 2007 and, in the months that followed, it led to the global financial crisis. Those that took up Peter Costello’s invitation to put their savings and or borrowings into superannuation and then bundled their money into the share market lost a fortune.

Looming super changes, and market jitters

And so now, exactly a decade later, in the period leading up to June 30, 2017, we are about to further restrict the money that can be put into superannuation on a tax-paid or non-concessional basis. This time the limit is to be $100,000. But you can invest $540,000, or three years’ contributions, at the current rate if you make the investment before June 30, 2017.

It is very clear that many thousands of Australians are doing just that, and have not waited until June 30. Some who have boosted their contributions are already buying shares in high-yielding banks and infrastructure stocks. It would seem that, as the superannuation buying pressure pushed up stock prices, so the shorters panicked and began to cover. I suspect short covering in the case of banks has eclipsed the super money demand.

A lot of international institutions are short Australian bank stocks, so would have been alarmed at the super driven buying. That cocktail triggered demand swings, so the upward thrust was interrupted during the week.

Once June 30 passes our stock market will perform in a more normal way and follow the US and local trends. At this point I can’t see a global financial crisis about to hit us, but it is fascinating that the US bond market is reacting in a way that is totally different to what most predicted six months ago.

Federal Reserve chief Janet Yellen is lifting interest rates, but instead of the bond rate rising in response it fell this week because investors are jittery about President Trump’s ability to ‘make America great again’ by tax cuts, sucking US funds held offshore back to the US and create spending on infrastructure. American and global funds are pouring into the US bonds. In other words, the bond market is telling us the US revival is going to be much tougher than was expected, and that is not good for global share markets. My contacts in the US say that the car market is weak, and the burst of oil drilling in the US is receding with the fall in the oil price. Those fortunate enough to have $540,000 to invest in super should be careful about repeating the mistakes of 2007 and plunging it into the share market.

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