In the past few months, several issues concerning the SMSF sector have arisen, including a new licensee, a well-received budget and an impending tax white paper. Selfmanagedsuper invited a group of SMSF professionals to provide their views on some of these topics.
DTC: Welcome everyone to this year’s selfmanagedsuper roundtable and thanks for taking part in the discussion. Let’s begin with one of the most significant recent developments in the sector and that’s CPA Australia’s move to become an Australian financial services licence (AFSL) and credit licence holder. What effect do you think this will have on the sector? Graeme, I’ll start with you.
GC: I think it’s interesting because we’ve seen this with CPA Australia before and they’ve tried to get an AFSL arrangement many years ago and now we’re seeing another version of it. Whether they are able to solve the associated liability issues I think is going to be the issue. The way we see it, when you look at the numbers of advisers that have gone through limited licensing arrangements with ASIC, you’re looking at around about a hundred, so that doesn’t seem to be attractive. We know from our membership base that accountants are acquiring financial businesses and vice versa and that’s part of the strategy to be able to provide financial advice. So it may be solved in other ways, but it’s good to see this because it’s something that could be available to advisers if they see that as an alternative to the other arrangements.
PB: It’s obviously early days in terms of what the impact will be. It’ll obviously take time for them to find their feet. They’ll need to put in place procedures and training and so forth. So it’s very early days to try and predict what the impact of the move is going to be.
SP: I was interested to see CPA Australia chief executive Alex Malley was planning to be the chief executive of the new advice business as well. To me that indicates they have perhaps underestimated the work involved in running an advice business and haven’t quite realised the level of involvement needed from him on a day-to-day basis. So if this is really going to be an important part of the service offering to their members, they’re going to have to resource it properly and I’ll be really interested to see if they are able to do that or if they have the interest in doing that and running it as a proper business. You can’t be a licensee, especially not when you’re licensing numerous external parties, you can’t run that sort of business just as a sideline to the main game.
SH: I agree with Sarah in that the devil is going to be in the detail of exactly how it works practically. And I think it raises a broader question in terms of potential conflicts with what their members are currently doing. It’ll be interesting to see how they navigate some of those potential conflicts with members who are currently running their own advisory businesses.
DTC: Will it provide the catalyst that will see more accountants looking to become licensed than we’ve seen to date?
GC: My experience with accountants is they’re two minutes to midnight sort of people. It will probably be well down the track before they realise that it’s just not about filling in a form and getting it ticked by ASIC (Australian Securities and Investments Commission). The RG 146 issue is one thing most of them really don’t understand. The qualification takes a little while to get and there are some procedural requirements they need to satisfy if they want their own licence. There doesn’t seem to be any urgency and I don’t think they’ll act until June next year.
SP: I think it’ll be interesting to see whether it hits May and people decide they do want to be licensed. Even though people are being courted all over the place by licensees to become part of their dealer group, there is still quite a rigorous process to go through to become part of a dealer group. It’s going to be really interesting to see what happens towards the end of May and into June next year and whether the people who have left it to the last minute suddenly find they’re actually unable to get licensed. At that point what might potentially happen is some of those people are going to turn around to CPA Australia and say “you’re our industry association so I’ll just be licensed through you”. This in turn will potentially put CPA Australia in a difficult position because it will then have to decide whether or not to license some of its members. There might be some of them whom CPA Australia might not want to license, but then they’re going to be in conflict with themselves as to how it can look after its own members if the accounting body is going to disrupt members’ businesses by not granting them a licence. But if CPA Australia doesn’t have time to do the proper due diligence, then it still has to protect its licence. On the other hand, CPA Australia might just let everyone operate under the licence, which may then lead them in five years down the track to the problems that numerous other dealer groups have had, which is when you let everybody in the door, you then have to get rid of some of them.
PB: It’s not something you can leave to the last minute, that’s for sure. Our experience through our SMSF Advice licensee is that it can take a good 12 months to comply with the training obligations and statement of advice templates and other processes that are needed to be in place to comply with the new licensing rules.
SH: It could be a good solution then for some of their members to utilise that licence. Among all the small accountants I’ve talked to, their single biggest concern at the moment is the looming licensing deadline and what they should do. I’m referring to one-partner firms with 10 people or the like. It’s a very big issue for them.
DTC: Will the move be seen as a threat to existing licensees, like SMSF Advice, offering solutions for accountants?
PB: We don’t believe so. As I said before, it’s early days so it’s difficult to know exactly what the impact is going to be. But it will take them some time to find their feet. So in the short to medium term we don’t see any significant implications from the CPA entering into this field.
DTC: It’s the first instance of a professional body becoming a licensee. Will there be others?
SP: I think Chartered Accountants Australia and New Zealand (CAANZ) will make a similar move. The two associations seem to have a sort of ‘frienemy’ set-up between them and if one of them has got such a big deal like this, I think the other will be watching with interest at the absolute minimum. But I’m sure they’re getting the same pressure from their members. I suspect that’s why CPA Australia did it in the first place, so I wouldn’t be surprised if the CAANZ do the same thing.
GC: Although when the AFSL legislation came out, it was only CPA Australia that made any moves then. The CAANZ didn’t touch it from what I know, but that’s just public perception.
KL: This year’s budget has been hailed for what wasn’t in it in regard to superannuation. David, how much of a confidence boost was this regarding the greater public strategy towards retirement savings?
DS: I think the lack of movement on super tax in the budget was a big positive and was consistent with pre-election and post-election commitments from the government not to move, and it was also consistent with the fact that the government’s put into play a process to review taxation generally, including super tax. So those are all positives in the sense that super tax can be seen to be part of a thorough process, that is, any potential reform can be seen to be part of a thorough process. It hasn’t helped though that there’s been so much noise in the media, and that tax on superannuation has become a day-to-day political football with statements from all sorts of stakeholders. I guess it doesn’t help the fact that we’ll remain in limbo and will be unclear what the long-term outcomes are of the review process for at least 18 to 24 months at a minimum. So I think it’s a big tick that we haven’t seen decisions driven by short-term fiscal pressures. That’s a really big positive and hopefully the review process will lead to some sensible outcomes.
PB: I think that the fact that there were no surprises is a good thing. It’s the first that I can remember that there were no surprises in the budget around superannuation changes and even the changes that were announced were obviously quite minor and they had announced most of those prior to the budget. We’ve just released the “Multiport Investment Pattern Survey” and it showed a significant drop off in voluntary contributions during the March quarter and we’re putting that down to some of the uncertainty around the superannuation rules. During that period there was a lot of discussion about the superannuation policy settings and tax settings and we believe it had an impact on people making discretionary contributions into super. So the fact that we had a pretty benign budget in terms of superannuation is a good thing. But I agree with David that there continues to be a lot of discussion about the policy settings, which are still causing some lack of confidence out there.
DS: The other thing to acknowledge is there were changes in the budget that affect retirement income policy. The changes to the means testing, the assets test taper, for example, actually does have an impact in terms of the value of a dollar of super saving. That’s because with a dollar of super saving you have to consider the tax take on the way through super and on the way out, as well as what kind of effect it’s going to have on the reduction of your age pension. So in some ways it would be great if we could see the age pension means testing and the other social security benefit means testing rolled in together with the review of the tax treatment of super going forward.
SH: The experience I had with my clients was a bit different to Peter in that I actually saw a massive upswing in the amount of discretionary contributions during March and April. I think people were very nervous about what might come out of the budget and, as a result, we saw a lot of people maximising their contribution opportunities. I think the other positive thing about the budget was it did not include a ban on limited recourse borrowing arrangements (LRBA). That’s been a big plus for our client base. Whether that changes down the track or not, we don’t know, but we certainly saw a lot of upswing in activity in that space of clients entering into those arrangements. But ironically I think announcing no change to the super rules in the budget actually provides less certainty than if some changes were announced. That’s because it brings on the inevitable conversation that change is going to occur at some point. So it’s a bit of a catch-22 for the government in the way they’re phrasing and approaching the debate.
SP: I’d agree with that. By being so strong about no change during this period it really highlighted that in preceding periods there’s been constant change and it sort of strongly suggested that if there will be no change in this budget, what would happen going forward? There’s a lot of pressure from various quarters of the superannuation industry more widely to have government ‘productise’, for want of a better word, retirement income streams. I feel quite strongly that we’re sort of in the eye of the storm – that we’ve probably gone through most of the change we’re going to see for a while, in terms of the accumulation phase, but now everyone’s attention has swung around to the drawdown phase. That’s where all the focus is and I think we’re going to start to see changes coming through on that side. It’s these continual proposed changes to the superannuation system that is really reducing people’s certainty in the system overall. And I think young people especially are just getting less and less confident the super system is going to look anything like it does now by the time they retire, which is quite a big issue.
DTC: From that point of view, Stephen, are you constantly having to explain to your clients what some of the proposed changes mean to them and reassure them superannuation is still a good saving structure?
SH: Yes and no. I think most clients have been around long enough to know governments can and do change the law. It tends to be more about working closely with your clients with the law as it exists at the moment and not worrying too much about what it might look like down the track. It’s about maximising the opportunities that currently exist because if you don’t, those opportunities are lost. So we do get those questions, but most people are pretty pragmatic to work with the law as it is.
DS: And I think we have a pretty good track record, reasonable track record, of grandfathering and not making retrospective changes or changes with significant retrospective impacts. They do arise from time to time, but overall I think we’ve got a reasonable track record on that front.
DTC: Is it reasonable to expect any government might have the discipline to acknowledge superannuation for what it is and not use the growing pool of money for fiscal remedies?
DS: I would say that it will always be under ongoing pressure, but that doesn’t mean to say that sooner or later the walls will break down and it’ll be raining, because I think it’s an ongoing process of education and people understanding its retirement income policy purpose. When that’s properly understood, I think the balance of opinion will recognise the importance of protecting it and will recognise the fact that we have actually arguably one of the best systems in the world.
PB: When you look at the value of the tax concessions and this debate about what that value actually is, and whatever the figure is, it’s a substantial amount of money in terms of the cost of the tax concessions. So I agree with David that it’s inevitable that there is always going to be some debate and discussion around what the policy setting should be around super. Hence the importance of agreeing on what the objectives of the retirement system are, so that when we do have those debates and discussions, we’ve got some guidelines under which those discussions can take place.
DTC: But is there a way we can get an accurate figure on what the value of those tax concessions is?
PB: I think we need a more sophisticated measure than we currently have. Treasury have publicly admitted their estimates of the cost of the concessions are not accurate. I think $32 billion is a figure they talk about, but that doesn’t factor in changes in investor behaviour. We know if the superannuation tax concessions are not there, individuals will look for other tax concessions. So we need to factor in these changes in consumer behaviour and we do need a more sophisticated measure. We’re not there yet, but it’s needed. If we’re going to drive this debate forward about what the policy setting should be, we do need a more sophisticated model as to what the true cost of these concessions are and how they are dispersed across the different income ranges.
DS: The other thing the common figure doesn’t take into account is the off-setting savings in the cost of the aged pension which super savings generate. So I think what we’re getting is some stakeholders bandying about those Treasury figures on the basis that it’s an indication the government’s misspending on super. On the other hand, it’s the job of the industry and those who understand more closely the relative failure of that number to explain the true accounting of it. I think where we’ll get to as a result of this, because all of this is becoming so much more a public debate, is a more sophisticated set of numbers. I have no doubt that we’ll head down that track because it’s just pivotal to so many arguments.
GC: You don’t need to think very deeply to see the disparities that exist. I mean the average balance doesn’t take into account people with multiple accounts, meaning it’s probably too low. Also if you have a look at the way self-managed super fund information is disclosed, and how it’s publicised, you’ll see there is no equivalent disclosure for the big funds. So on the very basic things we don’t even come up to scratch.
DTC: One item introduced in the budget was the indexation of the compliance penalty units. Will this be the ultimate encouragement for the corporate trustee structure to finally become more popular?
PB: Well, I hope so. I think the introduction of these penalties will change trustee behaviour; I think that’s inevitable. The cost or the value of a penalty unit was increased in the budget and that’s unfortunate for self-managed super funds, given those administration penalties were introduced less than 12 months ago and have now been increased by around 6 per cent. But I think the important point to note about the administration penalties is, and there’s a bit of a misconception about this, just because you breach one of the provisions in the SIS (Superannuation Industry (Supervision)) Act, it doesn’t automatically follow you get an administration penalty. An ATO audit has to be performed before penalties will be levied. Having said that, I still firmly believe the introduction of these penalties is a good thing and they will change trustee behaviour and one of those behaviours, hopefully, will be more SMSFs using a corporate trustee structure.
SH: I agree with that and I think for new SMSFs there is no question that you have to have a corporate trustee. The penalty units though may not have as much impact as it would appear on the surface. Having been at the coalface dealing with clients and ATO audits, unless you’re repeatedly breaching the SIS Act, you may not get a penalty notice. If it’s a once-off breach and gets rectified, you may not even get a penalty notice.
DTC: Was there anything else in the budget worth mentioning?
PB: One of the other measures in the budget that probably didn’t get a lot of press, which I think is a good outcome for the self-managed super fund sector, is that the commissioner will have new powers to make minor amendments to the superannuation and tax laws. I think at any one time there have been a lot of announcements that have not been enacted. These new powers will allow the ATO, in certain circumstances, to make amendments to the legislation without going through the full parliamentary process. So, an example was the introduction of the refunding of non-concessional contributions. That was announced in the 2014 budget but not passed into law until early this year, creating a state of uncertainty while it was not passed. This new power, hopefully, will give more certainty in those situations.
GC: I don’t think that you would see new measures introduced like that. The way in which it’d work would be similar to the modification declaration powers in the SIS legislation. So one example of that was the moderation declaration about actuary certificates where the law was inadequate and so they modified it to make it clearer.
DS: Matters of detail, really, I think.
PB: Although I know the ATO has made statements with the announcement that they will look to use those powers to speed up a patchy job of amendments to legislation that had been announced but not enacted.
KL: While there were no significant changes to the superannuation rules in the budget, just about all of you have touched on the current tax white paper process. What can we expect from it?
DS: It’s difficult to say because we hear about different ideas almost on a daily basis. Key policy development sources on possible tax changes have come from the Henry review and the Murray review, and the sorts of things talked about in that context have been ways in which the tax concessions on contributions could be made more even for people on different income levels. Henry proposed a flat rebate system where earnings tax might be a bit changed both from a sustainability point of view, with Henry looking at introducing the same tax rate for both the accumulation and the pension phase across the board, and also from an equity fairness point of view. We’ve seen the idea, certainly stated and discussed in a Murray context, of introducing an earnings tax or a higher earnings tax rate above certain thresholds, either pension income thresholds or account balance thresholds. And then at the end of the spectrum, both Henry and Murray were silent on the idea of taxing what you might regard as excess benefits, but certainly other stakeholders have put that as a possible source of change as well. Other things various players have looked at is tightening contribution caps, in particular non-concessional contribution caps. So that’s just four or five possible things on the table and obviously whatever solution a future government comes up with needs blending with every tax input and every phase of super to achieve an appropriate outcome. A lot of the current focus seems to be around equity or fairness and not quite so much on sustainability, but sustainability’s an important aspect of it as well.
GC: We see it from an adequacy point of view and also a sustainability point of view. If you have a look at some of the submissions, they seemed to be skewed towards the fiscal aspect of it, which I think is a little bit unfortunate, because we’re probably not looking at superannuation in the way we really should be looking at it. That is whether it will replace the aged pension system and things like that. But unfortunately it’s so intertwined politically that you’ve got to take those sorts of things into account. So if you do drop those caps as proposed or you tax them in a particular way, that might save the government some money, but what should their focus be? Should it be the actual superannuation system. We see that independently of the fiscal aspect?
PB: In the discussion paper we’ve seen, there was one out of 66 questions that specifically focused on superannuation and when you look at the commentary around that question in the discussion paper, it was very much picking up on some of the observations from the FSI (Financial System Inquiry). So we’re talking about whether we should have a standard rate of tax across the accumulation and pension phases and given we’ve got an ageing population, can we sustain the tax-free income in the pension phase? So that will certainly influence I think some of the debate. The other observation of whether the tax concessions are fair and equitable and if there should be a flat rate of tax applied to contributions will also be relevant. So certainly the indications coming out of the discussion paper are those key points.
DS: One of the things about some of the ideas being put forward is that in theory they sound quite good, but another key policy criteria has got to be practicality and political saleability. So if you take something like the idea of having the same earnings tax rate in pension and accumulation phase, and the Henry idea of it being pitched at 7.5 per cent, the proposal actually isn’t fiscally neutral for the government at the current point in time because the bulk of the people are in accumulation phase. It means the pension-phase tax would have to be at a higher rate, and if you introduced a significant tax rate in the pension phase overnight, you’d have political outrage if it wasn’t grandfathered. If this were to happen, it might actually cause an exodus from super in the pension or retirement phase because the tax treatment outside of super would be better for people with roughly less than $1 million. So there are all sorts of other settings that would have to change. The idea of having the same tax rate is a nice idea, but if we’re going to have that, we would have to work towards it gradually over quite a considerable period of time and that’s where the whole thing gets complicated.
PB: I agree there needs to be a lot more discussion and debate. The idea of a standard rate of tax for accumulation and pension phases is attractive from a simplicity point of view. It would certainly simplify things, but there are other issues that need to be addressed, indicating a lot more discussion and debate is needed about having a standard rate of tax across both phases.
DS: Of course Henry did actually recommend a standard rate of zero, but that was on the basis dividend imputation was removed, which throws up another issue. A zero tax rate sounds terrific, but I’m not sure the SMSF industry as a whole would welcome removal of dividend imputation though and that again is a very politically sensitive issue.
SH: There’d be a massive asset reallocation, which creates issues of its own.
KL: But will the white paper take into account implementation factors?
DS: I would expect that the stakeholders putting submissions in, certainly the industry-based stakeholders, will be making lengthy explanations of the practical pros and cons of different measures and different ways of adjusting the tax. So you’d expect during the comprehensive process the government would be well educated on some of the practical issues. Then again it’s just a question of making sure they fully understand those practical issues and give them appropriate weight.
KL: What about the dividend imputation system. Is it likely to be touched?
GC: I can’t see why you would want changes to the imputation system. All it is is a PAYG (pay as you go) system for tax collection. It’s no different to you and I paying tax on our salary or wages. If we don’t earn enough, we will get a refund of our credits and the same thing happens with imputation credits. The companies pay the tax on your behalf upfront, and depending on your tax rate, you may pay a little bit more or you might get a refund. I see it very simply and I don’t see what the advantages or disadvantages are by taking away that system.
SP: I’d put it in the same bucket as negative gearing. I think a lot of people think imputation credits and negative gearing are two of the fundamental things Australians use to grow their wealth, and if you try and take them away, it would be completely unpalatable from a political point of view, let alone the flow-on effects technically.
SH: I especially think with the imputation system, the fact that it’s refundable in pension phase, means politically it would be a very brave government that got rid of it. I mean it accounts for a lot of the refunds we see coming through.
DS: In terms of retirement income policy, I think in 2013 SMSFs got something like $2.65 billion from franking credit refunds. Using back-of-an-envelope numbers that might translate to be about $9000 of income per fund. Now if you take that away, that’ll be $9000 deducted from each individual’s super savings. So there is an adequacy issue. I mean how do you replace that $9000 in terms of retirement savings? The reason super earnings are taxed lightly is for the purpose of generating savings and so it would be a brave government to reverse the system to that extent.
DTC: There are arguments the dividend imputation system promotes home bias in SMSF investments and in turn a lack of diversification among SMSF investment portfolios. Does this lend more weight to the feeling the franking credit scheme has to be changed?
PB: Views on lack of diversification are sometimes overstated I think. There are a couple of reasons for that. We know that many self-managed super funds have a large exposure to the top 10 ASX-listed stocks. Many of those stocks have quite substantial overseas operations in their own right. So they’re generating quite a lot of overseas revenue anyhow and they arguably have some exposure to overseas economies. It means the official statistics showing the exposure the self-managed super fund sector has got to overseas markets potentially underestimates this. The other thing is that the research tells us that many trustees hold quite a considerable amount of their wealth outside of their SMSFs. In fact, a lot have 50 per cent or more of their wealth out of their funds. So looking at their SMSF asset diversification in isolation I don’t think is appropriate. You need to factor in what other assets they have outside their fund and they may have quite a bit of exposure to overseas equities or other investments. So you need to take that into consideration in this discussion.
DS: The other thing is, from a practical point of view, international investments are becoming far more accessible to SMSFs and so we already are seeing a significant upswing in investment in overseas stocks and overseas assets. I think the momentum in that direction is underestimated at the moment.
SP: It’s part of the maturing of the industry. The research keeps indicating Australians and self-managed super funds are looking for more and more international investment. In terms of facilitating that investment, the largest stockbroking houses and online brokers and platforms and others now allow you to invest into global equities. But I think it’s just part of the maturing market. I mean SMSFs have only been around for 30 years. It’s not a long time and to expect in that time every fund would have a fully globally diversified portfolio is a little unrealistic. Plus if you look at the last 100 years, the Australian stock market has performed exceptionally well. So it’s extremely difficult to turn around to people and then say you should be putting your money somewhere else for diversification.
DTC: The dividend imputation system and the accusation it is the sole domain of SMSFs has also been a factor in the latest round of sector bashing. This is of course a myth, but I would like to ask what it will take to have a proper informed discussion about SMSFs in the wider superannuation landscape?
SH: I think a lot of the newspaper headlines focus on the very, very top end of town. The 2012/13 ATO statistics showed 0.4 per cent of all SMSFs had over $10 million in assets. It’s really focused on such a small group and that’s what sells newspapers. But I think if you talk to the people in that group, and some of our clients are in that group, they’d probably agree a lot of the concessions they get are too generous and that change is inevitable. So I think SMSF bashing itself is unfair because the individuals that are being criticised don’t necessarily disagree with some of the comments. They just want a comprehensive and constructive process to have a proper debate about it. But it’s just such a very small group the critics are focusing on and that’s extremely unfair I think.
GC: I think if the larger funds disclosed information in the same way as self-managed funds, it would make a difference to these attacks. The analysis I’ve seen in the past few weeks indicates in six of the largest APRA (Australian Prudential Regulation Authority)-regulated funds there are between 12,000 and 15,000 people with accumulated benefits of more than $20 million and they don’t know how high those amounts are. So you’ve got members in the biggest superannuation funds that are just like self-managed fund members and that’s not disclosed. I think that story should be attacked in the same way. But you’re not going to see the big funds disclose these facts because it’s not to their benefit.
SH: Likewise you wouldn’t see the public service disclosing the current value of the defined benefit funds they’re servicing.
SP: I do think the quote ‘all truths are at first ignored, then ridiculed, and finally accepted as fact’ does apply to SMSFs. And I think self-managed super is moving into that last stage now. There was definitely a long time when SMSFs were just ignored as a side thing some people did and we all just pretended it wasn’t happening. Then we went through the stage of trying to get rid of them through legislation and trying to make them as unlikeable as possible. But I think realistically we’ve just about moved past that now. Currently about one in every 15 adults is in a self-managed super fund. So really the sector covers all walks of life and is just a part of the way our superannuation system works. I think we’re almost at the end of that as an approach to self-managed super. I think it’s just about becoming accepted as fact.
PB: We do have an association now that represents the interests of professionals and so forth and it’s done a very good job over the last decade in pushing the interests of the professionals that work in this industry. And that helps. Ten years ago a voice for the sector, and the SMSF Association itself, really wasn’t there like it is today.
DTC: Is it frustrating the same issues are being used to attack SMSFs over and over again almost on a cyclical basis?
GC: Yes and limited recourse borrowing arrangements are a good example of that. I mean that issue was blown out of proportion when really it represents nothing. It’s 1.6 per cent of a $500 billion asset pool so that’s $8 billion to $10 billion. But you’d read some articles and swear every self-managed fund had an LRBA. When you look at $8 billion to $10 billion, I’ve said this before, it’s not even a suburb in Sydney. So from that point of view it got so skewed it became absurd. But we still get people ringing us wanting to talk about articles on property and superannuation and how you can gear it. But the evidence to back up the argument is just not there.
DS: I suppose I see it a little differently to you, Darin, as not being about one general issue that needs to be debated and put to bed forever because I see SMSF bashing as taking a variety of different forms on a variety of different points. Graeme’s mentioned borrowing. You mentioned the alignment of SMSFs with wealthy retirees getting tax concessions. And it also can emerge around small balances as an issue and a whole range of other kinds of issues in terms of maybe control and those sorts of things. I think it’s just a case of every time one of these issues comes up, bodies like the SMSF Association have got to get in there and educate on that particular issue. So we’re never gonna put it to bed forever; we’ve just got to deal with them each and every time they come up and provide an accurate picture. It’s as simple as that.”