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Heffron Blog

Heffron's Blog is a collection of comments related to the latest superannuation comings and goings.

Industry funds and DIY investment options – can they compete with SMSFs?

by Meg Heffron

It would seem that industry funds are starting to work out that just adding a wide range of investment options in order to look more like a self managed fund is not the way to minimise leakage to SMSFs (http://www.smsfadviseronline.com.au/news/12954-diy-options-a-flop-for-apra-funds-bosses-admit).

I’d agree – in fact, I wonder if the industry funds who have done so are facing some probing questions from members along these lines :

Why have you spent all that money (that could have been used to reduce my fees) on doing something that was only ever going to be beneficial for a small group of people?  As it happens it’s been a flop but even if it hadn’t, how is it acting in the best interests of members to focus on features that are just not likely to be used by the majority of members?

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You may think you’re ready…

by Meg Heffron

Heffron Blog - You may think you're ready...

A funny thing happened when we were preparing our last Heffron SuperNews article (Issue #116 – SuperStream update).

We decided we would track the journey of the contribution and electronic service message from an employer to us (as a fund administration provider).

We knew what happened when it arrived with us – but was the process beforehand exactly as we thought?

We found an employer who was confident they were SuperStream ready.  They had dutifully reminded their employees of the need to provide an Electronic Service Address (ESA) some time ago (because as an employer with more than 20 staff, they had actually been subject to the SuperStream rules since 1 July 2014, albeit they knew they had a 12 month transition period).

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There’s risk and then there’s risk

by Meg Heffron

There's risk and then there's risk

Our last Heffron SuperNews looked at what options would be available for funds wanting to buy assets they can’t quite finance yet in a world that no longer included Limited Recourse Borrowing Arrangements.  It got me thinking about why there’s such a focus on killing LRBAs in the first place.

Much of the debate has focussed on risk.  In fact, the FSI report’s recommendation to remove borrowing from superannuation was predicated on an objective of “prevent[ing] the unnecessary build-up of risk in the superannuation system and the financial system more broadly” [p 86].

So it would be interesting to explore what exactly is meant by risk.

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Real time auditing – an exciting possibility or a service yet to find a value proposition?

by Meg Heffron

I’ve read a few articles on the prospect of real time auditing recently and have followed the debate with some interest. Real time auditing - good or bad?

So far, a lot of the discussion in the articles themselves has been about whether auditors can do it and whether they would like to in order to add more value.  What hasn’t been discussed in the particular articles I’ve read – other than as comments at the end – has been whether the trustees, advisers, administrators or regulators would like them to.

There is no doubt in my mind that the gradual move to real time information for trustees and those advising them is a good thing.  No doubt even Don Argus now thinks it’s better to know in advance that you’re in danger of failing to meet the minimum pension requirements, or that an asset the fund has just bought is probably a breach.  I know in our practice we’ve found the ability to have discussions about how contributions and pension payments should be allocated before 30 June highly useful!

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Cross insurance – red lighted by the ATO

by Meg Heffron

The rules on what types of insurance super funds could take out changed from 1 July 2014.  One strategy put at risk by the new rules was “cross insurance” – a common approach in funds with limited recourse borrowing arrangements where:

  • the fund has more than 1 member
  • it also has a loan
  • if Member A dies, the trustees don’t want Member B to be forced to sell the asset (either to pay out a death benefit or because they can no longer support the loan)
  • the trustee therefore took out insurance on Member A’s life (and vice versa) with the intention of using any proceeds to effectively pay out the loan or the death benefit or both, rather than adding it to Member A’s balance and paying it to his / her beneficiaries as part of a death benefit.

It is this last step – not paying the proceeds to Member A’s beneficiaries but rather keeping it in the fund for the long term benefit of Member B that raised questions. Click Here To Read More

So how often are reserves actually used in SMSFs?

by Meg Heffron

I recently read an interesting article quoting ATO assistant deputy commissioner of superannuation, Stuart Forsyth on the subject of SMSFs and reserves (http://www.smsmagazine.com.au/articles/ato-not-in-favour-of-reserves).

I’m always a bit dubious when the regulator professes to be “not in favour” of something.  Usually,  my first inclination is to wonder whether it’s just that there’s serious tax revenue leakage happening and the ATO hasn’t yet come up with a way of stopping it!

On this one, though, I wonder if Mr Forsyth might be bang on the money (and it hurts me to admit this).

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When you request an actuarial certificate….

by Meg Heffron

…have you ever wondered why your software thinks the balance of a member’s accumulation account is less than $0 even though you know earnings were positive and you’re pretty sure they didn’t take any money out?  In fact, perhaps the member even put a nice big concessional contribution into the fund right at the end of the year so your common sense is telling you the balance should be about that amount (less tax).

Look more closely and you’ll generally see that the issue is that a disproportionate amount of tax seems to have been deducted from the accumulation account.

Most software packages are fairly sophisticated in how they deal with tax these days.  They know, for example, that:

  • Concessional contributions get taxed – and so this tax comes directly out of the accumulation account(s)
  • Earnings on pension accounts don’t get taxed (and in fact pension accounts often get a refund which is added directly to the pension account)
  • Earnings on accumulation accounts do get taxed and so tax is shown as a withdrawal from that account.

In a mixed fund (with both pension and accumulation accounts), the amount of tax to be paid depends on the % certified by the actuary.  And there’s the rub – how do you know what that will be until you’ve received the actuarial certificate?  But doesn’t the actuary want to know the closing balances of the fund in order to give you the certificate in the first place?  There’s something awfully circular about this. Click Here To Read More

Why I started my SMSF with $30k

by Meg Heffron

I started my SMSF 20 years ago with about $30,000 when I left my first job.  It had 4 stocks, 2 of which immediately dropped  in value.  The remaining 2 stayed roughly the same during the next 4 years before I added to the capital when I left my second job.  (By then, I’d learned my lesson – I got advice and have done ever since. )

So why did someone who knew nothing about SMSFs, had limited interest in investment markets and – most importantly – had such a small balance make the decision to start a self managed fund?

While the common response today seems to be to take a cheap shot at accountants and blame them for all those funds with small balances, that was certainly not the case for me.  I researched the options and made a conscious decision to start one despite the fact that it clearly wasn’t the cheapest or safest approach at the time.

Why?

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1 January 2015 changes to the income tests for age pensions and the Commonwealth Seniors Health Card – should we make pensions reversionary now?

by Meg Heffron

When I first read the legislation, I would have answered yes to this question.  But having now done some modelling on it for our forthcoming SMSF Training Days I’ve concluded that quite often, the answer will be no.

Of course there are many reasons people make pensions reversionary – any that were valid before remain entirely valid today.  Our interest in this article is whether or not the changes to the income tests for the age pension and Commonwealth Seniors Health Card change the debate.

The reason they might is that both changes (from 1 January 2015) result in deemed income from superannuation pension assets being counted towards the income test for these benefits.  (The deeming rules are the same as the normal age pension deeming rules for financial assets – pension balances are assumed to earn income at 2% up to a fairly low threshold and then 3.5% thereafter).
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Deloitte’s call for a lifetime contribution limit

by Meg Heffron

Deloitte’s recent report presented the (perhaps unsurprising) view that in its current form, our superannuation system is unlikely to ensure that most Australians are adequately supported in retirement.

The report made a number of excellent points but one in particular has generated a bit of media interest:

  • The statement that contributions should be limited over an individual’s lifetime rather than on a year-by-year basis.

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