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Thursday, 29 November 2012 12:03

The Conflict of Industry Super Funds

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Illustration: Rocco Fazzari.

We are concerned about the conflict of interest within the Industry Superannuation Fund movement which has close ties to the union movement.

Below is an article we have been authorised to reproduce from the Intelligent Investor.

"As many of you will be aware we are currently doing the Intelligent Investor national tour. Returning from Brisbane on the plane yesterday, I grabbed the Australian Financial Review and came across the page two article 'Union super leaders see assets sale conflict ‘.

Now I have to admit to having a bit of a gripe when it comes to industry super funds – the marketing of their outperformance over retail super funds. Not that I am wanting to defend the poor performance of many retail funds but:

1. I don’t think it is an apples and apples comparison and, in any event, the timeframes covered are generally too short to be reliable. Industry funds make a big deal of the fact the asset allocations (between industry and retail) are different. This is the very reason why the comparison is inappropriate. Industry funds may well outperform their retail equivalents but the data that proves it has not been put in front of us yet.

2. More specifically, the performance of industry super funds in the post GFC period benefited from what investment bankers like to refer to as ‘mark to guess’ valuations.

What do I mean by ‘mark to guess’?

Accountants use two broad means of reporting assets on a balance sheet – historical cost (the original price paid for an asset) and mark to market (the current market value). Funds will generally use mark to market to calculate both their assets and their performance for a year.

What is often forgotten is that ‘Mark to Market (or MTM)’ itself consists of two broad subcategories:

1. Actual mark to market – where you look at the price of a security on a public market (for instance the ASX) and use that price. So if I was marking BHP shares to market today I would use $34.

2. Mark to guess – where someone sits at their desk and comes up with a number. Now some ‘mark to guess’ valuations are very accurate (typically where the asset has a strong relationship to a listed security) but others are less so. For instance, if you’ve had a property valuation done, one of the first things they ask is whether it is a ‘stamp duty valuation’ (ie low) or ‘sale/bank valuation’ (ie high). Enron’s energy traders were able to make massive profits (and bonuses) by doing their own mark to guess valuations of the positions they had on their books (nice work if you can get it). So, if BHP were to be de-listed, a mark to guess valuation might put it’s price anywhere between $30 and $40, depending on what the purpose of the valuation was.

Now, in the period post GFC, many assets benefited from the use of ‘mark to guess’. The ‘stock or bond market is not functioning properly’ was a popular excuse for why the market price of an asset wasn’t an appropriate value. Unlisted assets (esp property and infrastructure) were beneficiaries of this phenomena. They were valued more highly than listed assets (similar property and infrastructure) simply because the unlisted asset owners hadn’t been silly enough to have their shares quoted on a stock exchange.

What do industry super funds tend to hold more of than retail funds? Unlisted assets. So their performance benefited from the ‘mark to guess’ phenomena (and it has been a drag in the years since, as the gap between listed and unlisted has closed back up).

The ads were flying thick and fast, trumpeting their GFC performance, but the real message should have been ‘how lucky was that?’ Industry funds may well be better performers than retail funds but being able to use ‘mark to guess’ is not the factor that proves it.

So that’s my gripe explained. Back to the AFR article. In this case some of those with dual hats (union official/industry super board member) have come out and criticized proposals to sell various logistics, energy and water assets.

Whether this is a good idea or not is not the point. What this case highlights is the huge conflict of interest involved in having union officials also sitting on industry super fund boards.  A super fund’s focus should be (and is required to be) the retirement savings of fund members – those working, those approaching retirement and those who have retired. The financial interests of industry super fund members may well be served by having the Government doing a poor job of privatizing these assets. Every dollar the Government misses out on is a dollar that can be made by the buyers of the assets (which could include industry super funds).

Clearly, employees of these businesses (and their union representatives) have a completely different perspective. Again, their interests may clash directly with the financial interests of potential buyers. A cheap (or botched) sale by the Government may be great for the buyer, but not so good for the employees (it may also not be in the national interest – but that’s another point again).

Like a lawyer trying to act as both prosecution and defence, it’s a bridge too far. Sitting on the board of an industry fund, or acting as a union official, are both reasonably lucrative gigs. No-one’s going to starve choosing one or the other.

Of course, there may also be retail fund board members with similar conflicts. In either case I would say, in the interests of members, it’s time to pick a side.

Source:  Intelligent Investor Blog Site (http://blog.walnutreport.com.au/)

 

 

The ban on off-market transfers for self-managed superannuation funds (SMSFs) will not go ahead as planned from 1 July 2012, and is likely to be delayed for one year, according to Self-Managed Super Fund Professionals' Association (SPAA) technical directorPeter Burgess.

SPAA understands that the Minister for Financial Services and Superannuation, Bill Shorten, will announce the delay of the measure to 1 July 2013 before the end of the month.

Treasury is currently experiencing some "drafting issues" with the proposed ban on off-market transfers, which is "causing it a few headaches", Burgess said.

"In addition to the brokerage costs that SMSF trustees are going to have to incur because they have to go on market, they also run the risk of the market moving against them," he said.

"Since they can't be the other side to the trade, they have to wait until there's been a market price that determines the asset value. Then they can get into the market and buy it back," Burgess said.

"We continue to advocate for the removal of this proposal and for the introduction of an operating standard," he added.

SPAA director of education Graeme Colley said the ban on off-market transfers would have implications for employee share issue arrangements.

"If a public company wants to issue shares under employee share issue arrangements they can be transferred directly to the superannuation fund," he said.

But things would get complicated if the employee has an SMSF, Colley said.

"The question then becomes: does that company have to put the shares on the market before they can be transferred to the superannuation fund?" he said.

Wednesday, 25 May 2011 12:21

Personal Deductible Super Contributions

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For people who are self employed or persons with substantial taxable income personal deductible contributions are a way of tax deductible contributions to superannuation reducing your taxable income leaving more after tax money for investment.

 

What is the strategy?

Making personal deductible contributions reduces a person’s taxable income because the contribution is claimed as a tax deduction.

The contribution is taxed at just 15% which may be less than the tax paid if taken as taxable income. This means more after-tax money is available for investment, which increases a person’s overall retirement benefits.

 

Who is suited to this strategy and why?

This strategy is suitable for individuals who are:

  • primarily self-employed as a sole trader
  • under age 65 and who have not been employed in the income year the contribution is made, or
  • employed, but the income earned from employment is less than 10% of their total income.

The benefits of making personal deductible contributions are:

  • personal income tax is reduced
  • retirement savings are increased, and
  • small business owners can diversify their wealth outside of their business.

 

 

How the strategy works?

Individuals who are eligible to make personal deductible contributions into superannuation can claim a tax deduction equal to the amount of contribution.

The tax deduction reduces the person’s taxable income thereby reducing income tax.

Personal deductible contributions are taxed at 15% upon entry into super. This means the individual making the contribution will ultimately pay tax at 15% on the contributed amount instead of at their marginal rate.

 

Notice of Deductibility

To be eligible to claim a deduction for contributions to super, an individual must lodge a Notice of Deductibility form with their superannuation fund by the earlier of:

  • the date the individual lodges their tax return for that financial year, or
  • the end of the following financial year.

The form must be lodged prior to commencing a pension, rolling the contribution over to another fund or withdrawing the contribution.

 

Example

Kate is age 40. She runs her own mining engineering consultancy business as a sole trader, earning $185,000 per annum.

Kate’s financial adviser has recommended she contribute $20,000 into her superannuation fund as a personal deductible contribution.

Kate is aware that she won’t be able to access the contribution until she meets a condition of release, but she is interested in building up her retirement savings in a tax-effective manner.

The following table shows that Kate has created a tax saving of $5,100 as a result of implementing the strategy. Her cash flow has reduced by $11,900 but she has saved $17,000 for retirement.

 

Cash Flow Before

Strategy

After

Strategy

Gross salary $185,000 $185,000
Less personal deductible contributions $0 $20,000
Taxable income $185,000 $165,000
Tax on taxable income* $59,575 $51,475
After-tax income $125,425 $113,525
Superannuation    
Personal deductible contributions $0 $20,000
Less contributions tax $0 $3,000
Increase to super $0 $17,000
Net Package $125,425 $130,525

* 2010/11 financial year. Includes relevant tax offsets and the 1.5% Medicare levy.

 

Risks and implications

  • Making personal deductible contributions to superannuation reduces a person’s cash flow.
  • Contributions to superannuation are preserved until a ‘condition of release’ is met.
  • Personal deductible contributions count towards a person’s concessional contribution cap, as do SG contributions and salary sacrificed contributions. Contributions in excess of the concessional contribution cap are taxed at 46.5% and count towards the non-concessional contribution cap.
  • Reducing taxable income too low can result in more tax being paid as the 15% contributions tax paid on deductible contributions may be higher than the individual’s marginal tax rate.
  • Individuals who have worked through the year must be certain that they satisfy the 10% rule prior to making the deductible contribution.
  • Changes in legislation may reduce the flexibility or benefits that superannuation currently enjoys.

 

Note: Advice contained in this flyer is general in nature and does not consider your personal situation or needs. Please do not act on this advice until its appropriateness has been determined by a qualified adviser.  While the taxation implications of this strategy have been considered, we are not, nor do we purport to be registered tax agents. We strongly recommend you seek detailed tax advice from an appropriately qualified tax agent before proceeding.  The information provided is current as at May 2011.

Further information on Deductible Super Contributions can be found on our YouTube site which can be accessed via the website below:

Website:  www.gemcapital.com.au

 

or to arrange a no-cost, no-obligation first consultation, please contact the office on 08 8273 3222.

Blog Website:  www.investmentadviceadelaide.com

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