The month that was... Contents: Ripoll inquiry report. The value of financial advice. ASFA research attitudes to super. New life tables released

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1 TechWrap December 2009 The month that was... Asylum seekers on the Oceanic Viking and the RBA lifting cash rates another 25 basis points dominated the news in the early days of November. As the month progressed, we saw the finalisation of the IFSA super charter and the Ripoll inquiry reported their recommendations back to parliament. The Government's ETS legislation dominated the headlines as the countdown to the climate change summit in Copenhagen began and the Government tried to increase pressure on the opposition parties to pass their package of bills. Malcolm Turnbull's efforts to negotiate on this package ended in disaster as many Coalition members rebelled and installed a new leader, Tony Abbott. Contents: Ripoll inquiry report The value of financial advice ASFA research attitudes to super New life tables released IFSA super charter ATO writing to your clients SMSF update Trauma cover within SMSFs Excess contributions tax on SG Executive remuneration Clearing house for small businesses Centrelink debt waiver for small APRA funds Watch list

2 Ripoll inquiry report Page 2 The Parliamentary Joint Committee (PJC) for financial products and services tabled its report on the Inquiry into financial products and services ( Ripoll Inquiry ) into parliament on 23 November Ripoll Inquiry report makes 11 recommendations to Government Eleven key recommendations were made to the Government. Of these, those that have received most press coverage and generated discussions include recommendations to: amend the Corporations Act to explicitly include a fiduciary duty for financial advisers, requiring them to place their client s interests ahead of their own; consider making financial advice costs tax deductible; develop the most appropriate mechanism by which to cease payments from product manufacturers to financial advisers; and increase the powers of the Australian Securities and Investments Commission (ASIC) to deny, suspend or cancel financial services licenses. While the report has received bi-partisan support, it is important to note that the Government will need to enact law, before any of the recommendations become reality. The Government has indicated that it will officially respond to the content of this report when it responds to the Cooper Review recommendations on fees and commissions (included in phase two of the review). The Cooper Review will release preliminary recommendations on phase two in March - April 2010, with final recommendations on the Cooper Review being made to the Government on 30 June BT will be releasing further information on the Ripoll Inquiry report shortly. The full report can be found using the following link: ndex.htm The value of financial advice... advised clients save an extra $2,457 per year compared to nonadvised clients Research conducted by KPMG Econtech for the Investment and Financial Services Association (IFSA) has revealed that: those with a financial planner have $2,650 on average more in savings and investment balances than those without a planner (based on the level of savings in the 2007/08 financial year). an individual who has a financial planner saves an additional $2,457 each year compared to a similar individual without a financial planner. This research is timely given the Government s current review of the superannuation system. A copy of the KPMG Econtech Report is available on IFSA s website: ech%20(final%20report).pdf

3 ASFA research attitudes to super Page 3 Some interesting statistics were released from ASFA s annual research into community attitudes to superannuation. Some of these findings may be useful when discussing superannuation and retirement with your clients.... over 2/3 of Aussies believe that the 9% SG is not enough The key findings of ASFA s research include: over two thirds of Australians believe that the 9% Superannuation Guarantee (SG) is not enough to fund an adequate retirement having enough in retirement was one of the biggest concerns of those surveyed, rating above issues such mortgage payments, job loss, the global financial crisis and health care expenses 79% of respondents are currently satisfied with their super fund; much the same result as that reported 12 months ago 54% were satisfied with investment performance and only 11% very dissatisfied 53% of respondents are expecting better returns this year over the last 12 months, 79% of respondents have maintained their superannuation contribution levels despite declining returns 17% decreased their superannuation contributions as a result of the global financial crisis. However, of those 12% intend to increase their contributions over the next 12 months 28% consider that super fund fees offer good or excellent value 88% of respondents stated that they want more than $30,000 a year in retirement to support their desired lifestyle Further details can be sourced from ASFA s website: New life tables released new Australian Life Tables released The Australian Government Actuary (AGA) has released new Australian life tables. The life expectancy factors specified in the Australian Life Tables must be applied to relevant calculations for income streams that commence on or after 1 January 2010, including: the term for lifetime income streams; the term for market-linked income streams; and the deductible amount (for Centrelink purposes) for account-based and allocated income streams. The Australian Life Tables may be viewed and downloaded from the AGA website: h ttp://

4 Page 4 IFSA super charter... IFSA member companies formally endorse landmark superannuation member charter IFSA s 135 member companies comprising of retail and wholesale funds management, superannuation and life insurance industries have signed a historic charter introducing tough new industry standards which IFSA hopes will provide: increased transparency and control of fees to advisers in superannuation so that no member will be asked to pay for personal advice which they did not receive; enhanced competition through consistent data presented in advertising and promotion allowing members to confidently compare performance and fees with other like investment options and make more informed choice; improved regulation of the super industry; and a partnership approach with regulators and Government. While IFSA members are encouraged to implement these measures as soon as practicable, the policies outlined formally come into effect on 1 July 2010 with a managed transition period ensuring full implementation by 1 July Below is a high level summary of some of the changes:... members will be able to opt out of paying plan service fees Member advice fee (MAF) Members who receive personal financial advice will be asked to agree on the amount and method of payment for that advice with the ability to turn off the payment if they cease the relationship with their adviser. Applies to new personal superannuation accounts (pension and accumulation) and new corporate superannuation plans but not to existing accounts and plans or existing and new life insurance cover within superannuation. IFSA is requesting Government support for: legislative change to create tax neutrality so that investors can choose how they wish to structure payment for financial advice. regulatory change to ensure that payments for superannuation advice from superannuation benefits do not contravene the sole purpose test. Plan service fee (PSF) for corporate superannuation plans Members paying PSFs will have the ability to opt out of paying this fee and receiving any ongoing adviser services. Applies to new corporate superannuation plans but not to existing plans, new members joining an existing plan or new or existing life insurance cover within new or existing plans. Investment option performance comparisons To ensure comparability and consistency across the industry, superannuation funds should illustrate past performance net of investment fees and net of tax. Many non-ifsa member companies have typically reported past performance without reflecting the impact of dollar based administration fees, thereby overstating true performance.

5 Page 5 IFSA super charter cont.... use of averages to promote superannuation products will no longer be used Members will be able to compare the past performance of their particular investment options with other like investments, ideally having access to up to date investment option league tables. Superannuation funds should publish standardised performance results on their website and make it available to research houses or regulators. The disclosure of past performance returns does not apply to superannuation funds that have an IDPS structure which provide Investment Rate of Return (IRR) calculations. Truth in advertising and promotional material Use of averages to promote or advertise superannuation products are considered misleading and will no longer be used. All funds will use actual past performance data for real investment options. Use of past performance to forecast future returns over years can be misleading and should only be permitted in accordance with standardised assumptions and clear warnings. It is important to remember that these changes have been initiated by the IFSA membership to promote industry standards, and provide no guarantee that further, possibly more stringent, changes won t be implemented by the Government in response to the outcomes of the Ripoll Inquiry into financial products and services and the Cooper Review. A copy of the Super Charter can be found on IFSA s website: 0Member%20Charter_Final.pdf the ATO will write to taxpayers affected by new income tests ATO writing to your clients New laws came into effect to change the income tests used by the ATO and other Government agencies from 1 July The ATO will be writing directly to around 240,000 taxpayers whose latest income tax return suggests that they could be directly affected by the new income tests. The letters describe the new income tests, what the taxpayer can do and where to seek more information. Clients who salary sacrifice to superannuation are likely to receive a letter. Did you know The age pension turns the Australian Government first paid an age pension in 1909.

6 Page 6 SMSF update The minutes for the ATO NTLG Superannuation Technical Sub-group Meeting held on 8 September 2009 were released in November The minutes contained a number of interesting discussion points as detailed below....a pension payment must be made annually Can a SMSF run a business? The ATO are preparing information in relation to a SMSF carrying on a business. In particular they are looking at the requirements of Section 62 (ie the sole purpose test) of the Superannuation Industry (Supervision) Act Does the minimum pension have to be paid each year? The ATO attendees were asked if a fund could accrue a shortfall in the minimum pension in its financial statements and ensure this amount was paid in the following year. The ATO view is that superannuation legislation clearly states that a pension payment must be made annually and must be at least equal to the minimum required. Failure to pay the minimum pension each year would result in the loss of tax exempt status, and up to 15% tax applying to income and capital gains. Allocation of reserves in a fair and reasonable manner Generally, money allocated from reserves to a member s superannuation account will be included in amounts assessed against the member s concessional contributions cap. There is, however, an exemption 1 where the amount allocated in the financial year is less than 5% of the value of the member s interest at the time of allocation, and allocations are made in a fair and reasonable manner to either: an account for every member; or an account for every member in a class of members....generally money allocated from reserves will be a concessional contribution The ATO were asked if a member had multiple accounts, could the allocation for all of their accounts be made to just one account. The ATO s view was that this could not occur. What impact does an allocation from reserves have on the tax components of a superannuation interest? Where amounts are allocated from investment reserves they will be considered to be a concessional contribution unless they meet the exemption described above. Where amounts are allocated from reserves and they satisfy this exemption, they will: form part of the taxable component in an accumulation account; and be apportioned based on the components existing before the allocation, where allocated to an income stream. This approach will be taken regardless of whether the amount allocated from the investment reserve is a fixed dollar amount or an addition to the fund s earnings rate. Reduced input tax credits and adviser fees At the end of the minutes there is a lengthy discussion about the extent to which reduced input tax credits are available for financial advice fees. There seems to be a divergence on the treatment by some SMSF administrators. Several examples are discussed to show when they would and when they would not be available. 1_this exemption is allowed under subregulation (4) of the Income Tax Assessment Regulations 1997

7 Page 7 Insurance and its interaction with the concept of a superannuation interest With the increased use of transition to retirement pensions, more and more individuals will be of an age (55-65) where they will have or want to have life cover in their superannuation, while drawing down a pension. There may be significant tax differences for non-tax dependant beneficiaries holding life cover within the accumulation phase as opposed to the pension phase of superannuation.... insurance proceeds should go back into the account from which the premiums were deducted For example, let s look at the difference between holding life insurance in an accumulated superannuation account or a pension account for Harry s beneficiary, Matthew. Harry is 55 years old and if he passes away, his superannuation will be paid to his son Matthew who is 25 years old. Harry has $150,000 in superannuation which is 100% tax free. If he died his fund would also receive $150,000 from a policy on his life. Components and taxation of death benefit Within accumulated super Within a pension account Tax free component $150,000 $300,000 Taxable component - taxed $ 78,569 $ 0 element Taxable component - untaxed element $ 71,431 $ 0 Total benefit $300,000 $300,000 Tax payable when benefit paid to a (tax) non-dependant $ 35,465 $ 0 Net benefit payable to Matthew $264,535 $300,000 Assumptions: Date of death: 26/09/2009, Eligible service period start date: 26/09/1977, Date of payment: 1/12/2009 While the net benefit payable in our example is higher, it is important to remember that: no deduction would be available for the premiums for the life cover if held in the pension fund; the difference between the options depends on: the member s age at the time of death; and the member s earliest eligible service period start date In the minutes of the NTLG meeting the ATO advised that the insurance proceeds should go back into the account from which the premiums were deducted. This means that insurance premiums could not be paid from the accumulation account, where a tax deduction would be available, and then have the proceeds paid to the member s pension account. A copy of the NTLG minutes can be found at: htm Did you know December 2009 is the last month for small businesses to claim the small business tax break - 50% tax deduction for eligible expenditure.

8 Trauma cover within SMSFs Page 8 The ATO has released a draft SMSF determination (SMSFD 2009/D1) outlining the Commissioner s view on trauma insurance within an SMSF determining that such cover would not automatically breach the sole purpose test.... trauma cover... would not automatically breach the sole purpose test According to the Commissioner, the sole purpose test can be satisfied if: the policy is set up with the trustee as the beneficiary of the policy. This is to ensure that any benefits payable are paid to the trustee forming part of the assets of the SMSF until such time as a condition of release can be met; and the acquisition of the policy is not made to secure some other benefit for another person such as a member or a related party 1 ; and It is worthwhile noting the differences and similarities between the ATO and APRA views about trauma cover within superannuation. The ATO focus is on ensuring that the policy is set up correctly whereas APRA is more concerned that the insurance proceeds may be trapped in the superannuation fund until such time as a condition of release can be met. This is apparent in Circular III.A.4 (published by APRA in February 2001). Because trauma policies cover insurable events such as heart attack, strokes and cancer, suffering from such events does not automatically mean the member will meet a condition of release under SIS. For example, meeting the permanent incapacity condition requires a member to be unable to return to gainful employment, suffering from a heartache does not automatically mean a member will be unable to return to work at some time in the future....the trustee needs to consider the proportion of contributions applied to purchase the insurance Both the ATO and APRA, however, state that in determining whether to offer trauma insurance, a trustee needs to consider their obligations to members generally and factors such as the proportion of contributions applied to purchase the insurance. Both agree that an unreasonable diversion of contributions to purchase premiums would be difficult to reconcile with the sole purpose test and the fundamental retirement objective of superannuation. Whether this ruling opens the flood gates for SMSF trustees to take out trauma cover for its members is yet to be seen. It should be noted that this is a draft determination (and open for public comment until 4 December 2009) therefore the final determination may be quite different. In addition, it is also possible that the Cooper Review could recommend against certain types of insurance within superannuation. Unfortunately, the draft determination fails to highlight or discuss some of the tax consequences of holding trauma cover within superannuation such as: generally no tax deduction can be claimed by the fund for trauma policy premiums; possible CGT implications on the benefit proceeds; and if the member has not reached the age of 60 and/or cannot meet the definition of a disability superannuation benefit, the proceeds will create a larger taxable component when paid. SMSFD 2009/D1 is available on the ATO website: 1_The term related party is defined in subsection 10(1) of the SIS Act 1993.

9 Excess contributions tax on SG Page 9 One of the unresolved issues that has arisen since the introduction of contributions caps is the case of individuals who have multiple unrelated employers and where the mandated level of SG ensures that they exceed their concessional contributions cap.... Treasury are looking at a proposal to allow people to opt out of SG At the most recent ATO NTLG Superannuation Technical Sub-group meeting this issue was raised with the ATO. They were asked whether the Commissioner would exercise his discretion to disregard an amount that exceeds the concessional contributions cap, where the excess was due purely to mandated Superannuation Guarantee (SG) requirements. This question is of particular importance for individuals who have multiple, unrelated employers such as doctors and company directors. For example, Sam, aged 48, is employed as a director of two unrelated companies, both paying him a salary of $150,000 pa plus 9% superannuation. This means that the total SG paid on his behalf is $27,000, which is in excess of his $25,000 concessional contributions cap. The Commissioner has stated that he will not disregard the excess in this type of situation, and that excess contributions tax would apply to the amount exceeding the concessional contributions cap. While this response does little to help those currently in this situation, there is the possibility of relief being available in the future. Treasury are investigating a proposal to allow individuals to opt out of receiving SG contributions if these contributions are causing them to breach their concessional contributions cap. If such relief becomes available, it is believed that the process is likely to be similar to the process that existed for opting out of super under the old RBL regime, in that each individual would need to apply directly to the Commissioner for relief. A copy of the NTLG minutes can be found at: htm Executive remuneration... contracts entered into, altered or extended from 24 November 2009 will be impacted Executive termination payments Legislation to curb excessive termination payments to company directors and executives has received Royal Assent. As discussed in the July edition of TechWrap, the new regulatory framework will ensure that termination benefits for company directors and executives exceeding one year s average base salary are subject to shareholder approval. The changes commenced on 24 November 2009 and will not apply retrospectively to existing contracts as long as they are not altered or extended after the commencement date. Contracts that are entered into, altered or extended on or after 24 November 2009 will be impacted. Broader review of executive remuneration The final Productivity Commission report into executive remuneration in Australia is due to be delivered to the Government on 19 December This review is looking at executive remuneration in a broader sense and further changes are likely to be recommended in this report.

10 Page 10 Clearing house for small businesses Medicare Australia has been announced as the Government s free superannuation clearing house service for small businesses with less than 20 employees. This service will be available from July Medicare Australia free clearing house service for small businesses This free service will: allow small businesses to electronically pay their superannuation guarantee contributions to a single location (ie the clearing house) which will then process the transactions to numerous funds; discharge small businesses legal obligations to make superannuation guarantee contributions when the correct amounts are paid to the clearing house. Currently contributions made to a clearing house often need to be made weeks before the due date to ensure they reach the superannuation fund in time. It is uncertain if this will apply to all clearing houses or just Medicare. A Q&A attached to the media release provides further information on how the superannuation clearing house service will work; how small businesses will be able to register for the clearing house; why the Government chose Medicare Australia to deliver the service; and when the service will be available. In November 2008, a Discussion Paper on Superannuation Clearing House and Lost Members Framework was released by the Government. The outcomes of this discussion paper have not yet been released, leaving a few unanswered questions including: How long can Medicare sit and hold on to the contributions before transferring them to members accounts? Whether the clearing house can be used to process other types of contributions besides Super Guarantee such as salary sacrifice and/or personal contributions? What will happen when small businesses using this service grow beyond 20 employees? The media release is available at: htm&pageid=003&min=ceba&year=&doctype= Additionally, exposure draft legislation for the Government's Superannuation Clearing House has been released. The closing date for submissions on the exposure draft material is 23 December A full copy of the Exposure Draft legislation and Explanatory memorandum are available on the Treasury website:

11 Page 11 Centrelink debt waiver for small APRA funds...restructuring for APRA regulated funds must occur between 5 February 2010 and 1 July 2010 Background The October 2009 edition of TechWrap contained an article titled Centrelink debt waiver for SMSFs presenting an opportunity to restructure a 100% assets test exempt complying pension that failed to meet the high probability actuarial test. This opportunity is very restrictive in that it only applies to SMSFs that restructured their pensions to market linked income streams between 27 November 2009 and 1 July New social security specification Centrelink has now released the corresponding specification 1 which will provide debt relief to small APRA funds. This will work in exactly the same way as relief applying to SMSF s but with a later commencement date. For small APRA funds, restructuring to a market linked income stream must occur between 5 February 2010 and 30 June 2010 to take advantage of this relief. Further information on how this works can be found in the October 2009 edition of TechWrap. 1_Social Security (Waiver of Debts Small APRA Funds) (DEEWR) Specification 2009 (No.1) Watch list 14 December 2009: closing date for submissions for Cooper Review Phase Two: Operation and Efficiency and release of issues paper for Phase Three: Structure (including SMSFs) Seasons Greetings The BT Technical team would like to wish all our readers a Merry Christmas and a Happy New Year. The next edition of TechWrap will be available in early February FOR GENERAL INFORMATION ONLY This information has been prepared by BT Funds Management Ltd ABN It is provided solely for the general information of external financial advisers and must not be relied on as a substitute for legal, tax or other professional advice. Further, it must not be copied, used, reproduced or otherwise distributed or circulated to any retail client or other party. The information is given in good faith and has been derived from sources believed to be accurate at its issue date. However, it should not be considered a comprehensive statement on any matter nor relied upon as such. BT Funds Management Ltd (including its related entities, employees and directors) does not give any warranty of reliability or accuracy or accept any responsibility arising in any way including by reason of negligence for errors or omissions in the information.