Matthew Lane, QSuper. Session Sponsored By

Transcription

1 Matthew Lane, QSuper Session Sponsored By

2 Matthew Lane Acting Head of Tax QSuper Limited Thursday 20 November 2014

3 The views in this presentation are those of the presenter. Any views or opinions expressed do not necessarily reflect those of QSuper Limited. The information is not intended to constitute advice and persons should seek professional advice before relying on this information. page 3

4 page 4 Superannuation the current state Examples of improved member outcomes arising from effective tax management an innovation Segregation of pension assets Tax benefit on retirement

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6 page 6 Life expectancy Size of superannuation pool Cost of age pension as a % of GDP % of Australians aged >65 Ratio of workers to retirees

7 Demographic shift due to aging population revealing weaknesses in the way the system caters for those entering retirement Industry focus on design of retirement income streams Review of retirement income stream regulation discussion paper July 2014 Financial system enquiry interim report Treasury The future of Australia s super: a new framework for a better system ASFA November 2014 page 7 What does this mean?

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9 page 9 Retirement income product offering will change resulting in changing investment strategies and asset allocations to support these products Retirees are likely to benefit from increased choice in retirement income stream products that can help them manage effectively the variety of risks they face in retirement. Product development and innovation is essential to ensure there is a range of products available that can cater to retirees different needs and preferences. Treasury 2014, Review of retirement income stream regulation discussion paper

10 Examples of improved member outcomes arising from effective tax management an innovation Segregation of pension assets page 10

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12 Comingled accumulation and pension assets are a significant cause of inaccuracy and inequity in a tax provisioning process Taxable Entity Super Balanced Super Growth Super Moderate Pension Balanced Pension Growth Pension Moderate Cash Internationa l Equities Australian Equities

13 Allocation of the Fund s tax expense When calculating unit prices, tax is provisioned (effectively) on a segregated basis that is: No tax provisioned on income attributable to Pension Options (exempt income) Tax provisioned on Accumulation Options at the relevant effective tax rate (taxed income) The split of exempt income and taxed income depends on the exposure of the Pension vs. Accumulation Options to that particular investment. This differs for each option, each day. For example, the proportion of Pension Option exposure to less risky investment strategies (e.g. Cash/Fixed interest) would typically be higher When tax is calculated at a Fund level on an unsegregated basis, an actuarial percentage assumes a constant split of exempt income and taxed income across all Investment Options that remains unchanged for the full year This results in differences between the tax that has been provisioned and the tax that is ultimately paid to the ATO over/under provisions

14 Sharing of actual capital gains and losses Capital gains derived from assets attributable to Pension members can be offset by losses derived from assets attributable to Accumulation members. No tax deducted from Pension members A tax benefit is provided to Accumulation members Fund s tax position is neutral (under provision) Similarly: Capital gains derived from assets attributable to Accumulation members can be offset by gains derived from assets attributable to Pension members. Tax deducted from Accumulation members No tax benefit is provided to Pension members Fund s tax position is neutral (over provision)

15 Unsegregated Fund Segregated Fund Accumulation Investment Option Pension Investment Option Accumulation Investment Option Pension Investment Option Asset Class Asset Class Asset Class Investment Portfolio Investment Portfolio Investment Portfolio Pension exemption section Pension exemption section

16 Pension exemption section

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18 Alignment of unit pricing methodology to calculation of Fund tax liability Ability for divergence of investment strategies between Accumulation and Pension leveraging tax attributes of each pool. Share buy backs Foreign income tax offsets In-specie transfer of assets between Accumulation and Pension portfolios Ability to capture reduction in Deferred Tax Liability on movement of capital between Accumulation and Pension

19 page 19 Examples of improved member outcomes arising from effective tax management an innovation

20 Tax Benefits in Transition to Pension Phase if anybody in this country doesn't minimise their tax they want their heads read Kerry Packer 0 20

21 the Panel has concluded that super fund tax issues are not being given adequate priority by the industry Are tax issues being given adequate priority? Questions in respect of rolling from accumulation to pension phase Are current unit pricing practices ensuring equity between members? Is there a solution? page 21

22 Most superannuation funds have co-mingled accumulation and pension assets When a member rolls into pension phase the fund s deferred tax liability reduces This is reflected in the unit prices for members remaining in accumulation phase Is this consistent with the basic unit pricing principle of ensuring equity between members? page 22

23 1. Members rolling into pension phase receive no tax benefit 2. Members remaining in accumulation phase receive a windfall An example page 23

24 4 Tax Benefits in Transition to Pension Phase Assume no realisation of gains Start Rollover End Current process using net of tax unit price Accum Pension Total Accum Pension Accum Pension Total Gross asset value Unrealised capital gain Deferred tax liability Current tax liability Franking credits Net asset value NAV 102 Units /UNITS 10 = UNIT PRICES INCREASE FOR ACCUM NO CHANGE FOR PENSION Unit price (net) Unit price (gross of deferred tax) NAV /UNITS 10 =

25 The winners Members in accumulation phase The losers Members rolling into pension phase The superannuation fund What does this mean? Inequity between members SMSFs have comparative advantage page 25

26 Tax Benefits in Transition to Pension Phase Assume no realisation of gains Start Rollover End Current process using net of tax unit price Accum Pension Total Accum Pension Accum Pension Total Gross asset value Unrealised capital gain Deferred tax liability Current tax liability Franking credits Net asset value Units Tax benefit to Fund =(2-0.98) = Unit price (net) Unit price (gross of deferred tax)

27 Arbitrage opportunities Length of time the member has been in the fund Length of time a member has been in each member option Impact of rolling back from pension to accumulation Impact of rolling into another fund Unrealised losses page 27 Complexity of calculations

28 What are the benefits to the members of crediting tax benefits when commencing pension phase? Free tax credit at the point of rolling into pension phase What are the benefits to the superannuation fund? More equitable distribution of tax liabilities between members Ability to compete with SMSFs on a more even playing page 28 field

29 Tax Benefits in Transition to Pension Phase Does segregating accumulation and pension assets in the superannuation fund help? 9

30 Tax Benefits in Transition to Pension Phase Member Options Balanced Pension Balanced Accum $20 $80 Moderate Pension Moderate Accum Asset Towers Aus Equities $100 Investment Portfolios Aus Equities Value Aus Equities Growth $50 $50

31 Tax Benefits in Transition to Pension Phase MIC Options Balanced Pension Balanced Accum $20 $80 Moderate Pension Moderate Accum Asset Towers Aus Equities $20 Aus Equities $80 Investment Portfolios Aus Equities Value $10 Aus Equities Value $40 Aus Equities Growth $10 Aus Equities Growth $40

32 Tax Benefits in Transition to Pension Phase MIC Options Balanced Pension Balanced Accum $20 $80 Moderate Pension Moderate Accum Asset Towers Aus Equities $20 Aus Equities $80 Investment Portfolios Aus Equities Value $10 Aus Equities Value $40 Aus Equities Growth $10 Aus Equities Growth $40

33 Tax Benefits in Transition to Pension Phase The issue is not about reducing tax liabilities The issue is about equity between members Currently members receive a benefit through the accumulation phase rather than on the point of rolling to pension phase How fairly is that benefit allocated between members? Member equity can be enhanced even if precision is logistically impractical Large superannuation funds can compete with SMSFs 3 33

34 Tax Benefits in Transition to Pension Phase 4 34

35 3.00pm 3.30pm Charity of the Day: Sponsor of the Day