For whom Debelle tolls?

www.moivepostershop.com

Every now and then something jumps out from the noise of the 24 hour media cycle. This month, we had one of those moments.

Dr Guy Debelle is Assistant Governor (financial markets) of the Reserve Bank of Australia. Essentially, his speech on Wednesday 14 October, presaged a "violent" sell-off in the markets. "Violent" because liquidity is less than is commonly thought. He indicated that people think "they can get out in time" and observed "History tells us that this is generally not a successful strategy. The exits tend to get jammed unexpectedly and rapidly" and "one should never underestimate the role of mechanical rules or mandates" in driving market behaviour. 

Debelle said traders appear to be underpricing risks around Middle East and Eastern European tensions, potential changes in US interest rates, policy uncertainty in Europe and Japan and rising concerns about China's economic health. Why did he make this speech? What is the market data telling us?

The Australian stock market has had a dip, but is recovering (S&P/ASX200: from 5658 on 2 September to 5155 on 10 October, and back up to around 5,450 on 29 October). The US S&P500 has been in a similar pattern during October: down 148 points since 18 September and rebounding 6.6%,  now back to where the index started the month. The VIX (Chicago Board Options Exchange SPX Volatility Index): hit 26.25 in mid-October, its highest point all year up from 10.32 at the start of July. (However, note significantly lower than Aug 2011 when it was at a level of around 43). US 10 year bond yield dropped below 2 on 15 October, falling the most since 2009 and Treasury trading volume reached the highest on record. Bloomberg reports this is being interpreted that traders are dropping bets that the Federal Reserve will raise interest rates in 2015.  Is it due to the weakness in data, geopolitical risk, a turn in consumer sentiment and consumption which is leading to increased volatility? Is it the reawakening of the European debt crisis as Greece, Portugal, Ireland and Italy experience surges in their 10 year bond yields?  Will Mario Draghi and ECB do "whatever it takes"? We can't be certain.  

Alan Kohler wrote on Business Spectator, 15 October about Debelle's speech.

...for five years Europe has been lurching from crisis to despair, but markets have been untroubled beyond annual, short-lived corrections (apart from last year) because of what the Fed was doing. America’s vigour trumped Europe’s pathos.
But now Europe is slipping back into recession and investors are beginning to price in the prospect of long-term stagnation and deflation. That’s what last week’s action was about.
If the ECB doesn’t respond to this by launching QE, and Germany continues to force fiscal austerity on the rest of the Europe, markets will eventually tank and Guy Debelle will be proved right. 

To return to Debelle:

One should always be careful of looking for too much rationality in trying to understand market dynamics.

On the flip side, Ian Narev, CEO of the Commonwealth Bank of Australia,on 15 October gave a list of positives, including:

living in an economy with 22 years of consecutive growth (even though that can foster complacency), the fact Australia still has GDP growth, household savings rates having strengthened, business balance sheets looking good, business credit quality looking good and a government that understands the risks of excessive borrowing. 

We also have state and federal governments committed to spending on infrastructure and a central bank that manages monetary policy "exceptionally well", he says. 

Better than exepected company earnings and signs of a recovering economy in the US have led to good consumer confidence numbers at the end of this month.  Globally, however, signs of economic slowdown and low growth abound.  Sage Advisers continues to keep a close eye on all market indicators and we continually and actively keep clients' risk profiles in mind when advising on their exposures and investment allocations.

SG changes - on the never never?

Fairfax, 4 September 2014

The government has announced it will defer the proposed increases in the compulsory superannuation guarantee amounts to be paid in Australia.

What are the changes?

	Rate under new deal (%)	Previous law (%)
2014/2015	9.5	9.5
2015/2016	9.5	10.0
2016/2017	9.5	10.5
2017/2018	9.5	11.0
2018/2019	9.5	11.5
2019/2020	9.5	12.0
2020/2021	9.5	12.0
2021/2022	10.0	12.0
2022/2023	10.5	12.0
2023/2024	11.0	12.0
2024/2025	11.5	12.0
2025/2026	12.0	12.0

Until yesterday, compulsory contributions to superannuation were due to increase from July next year; under the new deal, they will remain steady until 2021.

This will improve the budget position over the coming decade, but in future may lead to lower super balances on retirement for individuals, which in turn may put pressure on the public purse to fund aged pensions. Keating calls it "wilful sabotage of the nation's savings" but PM Abbott says the policy change means "keeping more money in workers' pockets".

The Low Income Superannuation Contribution (LISC) will now be retained until 2017. 

It is to be hoped that the Murray Financial System Inquiry will recommend ways in which efficiencies can be introduced into the current system (such as lower fees for industry funds) that would mean less of members' funds being eaten up by fees and charges.

There has been no change mooted to date with specific reference to SMSFs but it is possible that tax concessions for higher income earners (who more frequently use SMSFs) may become a target for the government to make budget savings coming into the next election. Discourse on this topic started prior to the last election but was quelled by ALP senior figures such as Bill Kelty see here and Nick Sherry here.  

It will be interesting to see the Government's interpretation of its 2013 election promise:

To help Australians have confidence again in superannuation we pledge not to make any unexpected detrimental changes to superannuation.

Budget 2014

Superannuation doesn't appear prominently in the headlines about this year's Budget. The announcements as they relate to superannuation and retirement are tweaks rather than major shifts.  

Any major policy change in this area lies at some future point, possibly arising from the findings of the Murray Inquiry into the Financial System, see comments here and the Inquiry's webpage for its terms of reference. 

The first budget of the Abbott government has been handed down to start the "repair" of the budget imbalance brought about by government spending more than the tax intake since the GFC.  Treasurer Hockey has spoken since his 2012 speech in London that "the Age of entitlement is over", that the young need to "learn or earn".  The clear implication is that all Australians need to share in the repair job.  High income earner's "repair levy" for three years of tax at 49% for amounts over $180K, wages freeze for politicians, 16500 job cuts for public servants, cuts to health and education, the introduction of co-payments for medicare & pharmaceutical costs and generally a more stringent range of tests for eligibility for middle class welfare such as family tax benefits and child care benefits evidence these values of the need to prepare the nation for an ageing population with a greater drain on the public purse.

The Budget announcements for self funded retirees to know include:-

• An individual's superannuation pension will be included in the income test for pension eligibility but not the family home (as was recommended by the Commission of Audit);
• Age pensions will be indexed to CPI rather than wages from 2017 and the upper and lower thresholds for the age pension eligibility will be fixed for 3 years from 2017 (which may lead to a lowering of benefits payable for some);
• The Commonwealth Seniors Health Care Card thresholds will be indexed from 20 September 2014;
• The annual non-concessional contribution cap will go up to $180,000 from 2014-15, up from $150,000. The bring-forward rule will permit a one-off non-concessional contribution of up to $450,000 over three years, or $540,000 over three years from 2014-15;
• Non-concessional super contributions made from 1 July 2013 that exceed the cap may be withdrawn (plus earnings on the excess) without penalty (with tax payable at the individual's marginal tax rate rather than the current 47%, which had been planned to move up to 49%);
• The time frame for increasing the Superannuation Guarantee contribution rate to 12% will be taken out to 2022, compared with the former ALP government's initial timing of 2019;
• Eligibility for the age pension will be increased to 70 from 67, effective 2035 (relevant to those born after 1965).

Overall, these tweaks fall within the language of building a narrative of short-term pain for long-term gain.  We think the last word on the topic of entitlement as it relates to superannuation concessions is a long way from having been uttered.

ATO SMSF Penalties - change afoot

www.theaustralian.com.au

From 1 July 2014 there will be a new penalties regime in place for trustees of SMSFs as legislation has been passed by Parliament.  These penalties may be imposed personally on trustees and directors of corporate trustees; and are to be paid out of the trustee's own pocket.

You can see from the table below the penalties are graduated.  Many are quite severe and may put trustees in a position of financial hardship. Trustees in breach may not pay fines out of their super fund accounts (or be reimbursed for such payments out of super fund assets) and may not have the capacity to pay the fines otherwise.

In addition to financial penalties the ATO will have the power to require trustees to undergo education and training in compliance to gain a better understanding of their obligations and responsibilities as Trustees, thereby aiming to avoid breaches of the law in future.

For more serious or repeat breaches the ATO retains existing powers, such as making the fund non-complying, disqualifying Trustees or instigating civil or criminal penalties.

The reason the ATO has sought to expand upon its available penalties can be seen from the Explanatory Memorandum to the legislation:

Applying current penalties can be costly and time-consuming and the potential consequences can be disproportionately high. The Regulator is unlikely to use his existing range of powers except in cases of significant non-compliance with the law. 

The [current] absence of graduated penalties results in a number of SMSF trustees avoiding sanction for contravening the law simply by rectifying the conduct when it is detected. This may be appropriate in certain circumstances, however, in order to encourage greater levels of voluntary compliance, it is not appropriate that trustees can continue to contravene the law and expect their actions to have no consequences because the available enforcement remedies are not proportional to the conduct

 We note in particular the prohibition on super fund borrowing (except as permitted), on lending to related parties,  the In-House Asset rules and failure to notify the ATO of an event that has a significant adverse effect on the fund's financial position.  Note too, the penalties for inadequate record-keeping.  

Section & Rule	Administrative Penalty
s.35B – failure to prepare Financial Statements	$1,700
s.65 – prohibition on lending or providing financial assistance to members & their relatives	$10,200
s.67 – prohibition on super fund borrowing, except as permitted, eg limited recourse borrowing arrangement	$10,200
s.84 – contravention of In-House Asset rules	$10,200
s.103(1) & (2) – failing to keep trustee minutes for at least 10 years	$1,700
s.103(2A) – failure to maintain a s.71E election, where applicable, in relation to a fund with an investment in a pre 11/8/99 related unit trust	$1,700
s.104 – failing to keep records of change of trustees for at least 10 years	$1,700
s.104A – failing to sign Trustee Declaration within 21 days of appointment and keeping for at least 10 years	$1,700
s.105 - failing to keep member reports for 10 years	$1,700
s.106 – failing to notify ATO of an event that has significant adverse effect on the fund’s financial position	$10,200
s.106A – failing to notify ATO of change of status of SMSF, eg fund ceasing to be a SMSF	$3,400
s.124 – where an Investment Manager is appointed, failing to make the appointment in writing	$850
s.160 – failing to comply with ATO Education directive	$850
s.254(1) – Failing to provide the Regulator with information on the approved form within the prescribed time upon establishment of the fund	$850
s.347A(5) – Failing to complete a form with requested information provided by the Regulator as part of the Regulator’s Statistical Program	$850

It will be important for all SMSF trustees to ensure compliance prior to year end in order to avoid these penalties..

The "one stop financial shop".

The Commonwealth government has recently indicated it would not implement certain aspects of the FOFA reforms relating to "best interests" duty requirement and commissions payable to advisers who recommend financial products.

Like all policy changes, there will be consequences of these decisions. One consequence which is keenly sought by the big banks and their subsidiary wealth management businesses is the "one stop financial shop" because it keeps the fees and commissions payable in house.  

Michael West, in the Fairfax press, notes both the "magnitude and layers of fees" are simply too high, and are failing consumers.  He argues the big four banks and AMP are "preying" on customers by imposing an average of 0.75% adviser fees on top of an average platform fee of 0.50% and product management fees on top.  Not only are these fees high, but the choice of products is limited by the big funds which are "upstreaming" clients'cash balances into the parent banks at low rates of return, with "no pretence" of shopping around for better rates. West notes this is "cheap funding for the banks" and arguably amounts to another fee "in the guise of the cash performance foregone".

We also note the recent piece from Christopher Joye in the Financial Review:

The far-reaching nature of the government's desired changes could result in the development of vast sales forces of spruikers working for vertically integrated institutions that both build and distribute products.

Joye adds, "the issue of embedding commissions and sales bonuses back into the finance industry's DNA is merely the dorsal fin of a much more dangerous and formidable set of dysfunctions that lurk beneath the surface".  Paring back the evocative language, Joye's point is the same as West's: the financial services industry is not well served by the return of commissions in an environment of strong vertical integration thereby creating conflicts, which are compounded by the implied government guarantee provided to all approved deposit taking institutions during the GFC (and which still remains).

Adding to the chorus, Alan Kohler stridently notes in The Australian:

Senator Sinodinos and his colleagues should be sending a message loud and clear to all financial planners that they are not sales-people - they are pure advisers.
That would be in the best interests of the many financial planners who are pure advisers and are usually members of the FPA. The only way to do that is to ensure that no adviser can be paid for selling, only for advice.
Unfortunately, a welcome attempt to cut in the cost of financial advice by removing regulation has been completely nullified by the reintroduction of sales commissions. Senator Sinodinos and his team should just focus on getting the price of advice down.

As a truly independent adviser Sage Advisers can note here that there are various technological and regulatory changes which offer alternatives and real potential for SMSFs to have greater choice and control over product selection and cost of investments.  They include:

• mFund - the new paperless settlement service to trade managed funds in a way similar to CHESS (mFund was formerly known as AQUA II).  The ASX has received final regulatory clearance from ASIC and AUSTRAC for mFund to begin operations in April. mFund will benefit SMSF investors, who have traditionally used the ASX just to trade equities.  This development will allow SMSFs to build more diversified risk-managed portfolios and you can read more about it here;
• ETFs - exchange traded funds have developed significantly in Australia and overseas and are now a very popular choice for investors.  SMSFs have increased their use of them by almost 50% in the last 12 months.  Most of our clients have taken advantage of these ETFs and can see their advantages.
• Sage Online - our software available at a cost of $330 p/a for our clients to view their investment portfolio any time, anywhere.  This provides a wonderful snapshot and gives real-time reports, at a cost far less than the expensive wrap account fees offered by the majors. It also offers reporting on a flexible, independently selected product list.

Sage Advisers offers tax compliance,  fund administration and personalised professional advice under our own independent AFS Licence and Tax Agent Registration. 

The possibility of truly independent investment advice remains in spite of the domination of big banks.  
There is nothing wrong in theory with the "one stop shop" but the discerning consumer must peel back the layers of the onion in order to understand the nature of the relationships between the adviser and the products s/he has recommended. Getting down to that detail can be difficult and hidden in the volumes of paperwork.

Who has control of your super fund balance when you die? Wooster v Morris

www.talentbank.com

It's likely you already know that super lies outside your will.  You probably have thought about and may have executed a Death Benefit Nomination and think that you've covered this issue.  You may need to think again.  A recent Supreme Court of Victoria decision highlights some important issues for those wishing to ensure their super account balances are passed to the right beneficiary or beneficiaries in a timely manner.

In November 2013, in the case of Wooster v Morris, Justice McMillan upheld the validity of a binding death benefit nomination which had been determined by the self managed super fund's trustee to be invalid.  What was the problem?

Let's set the scene.  Maxwell Morris had two daughters, Susan and Kerry, with his first wife.  In March 2008 Maxwell Morris made a binding death benefit nomination in favour of Susan and Kerry, prior to his death in February 2010.  At the time of his death, Maxwell Morris and his second wife, Patricia, were both members and individual trustees of the super fund.  After Maxwell died, Patricia appointed her son (from a previous marriage) Nathan Ashman as co-trustee and then together they sought advice from DLA Piper solicitors about the validity of the binding death benefit nomination.  Patricia and Nathan subsequently resolved to replace the trustees with a corporate trustee, Upper Swan Nominees Pty Ltd.  Patricia was the sole director and shareholder of Upper Swan.  There were also accounting errors made by Patricia's accountant for the years 2009 and 2010 because the accountant had not accurately recorded Maxwell's entitlements under the accounts in his name for those years.

DLA Piper solicitors gave Patricia,  Nathan and Upper Swan legal advice that the  binding death benefit nomination was invalid and not binding on Upper Swan as trustee. This advice was based on their instructions that the binding death benefit nomination had been prepared by Maxwell but not delivered to Patricia, as required by the terms of the super fund trust deed.  Upper Swan then resolved to accept the legal advice and determined that the Binding Death Benefit Nomination was not binding on it as trustee.  All the funds in Maxwell's super fund accounts were then applied to Patricia's super fund accounts held solely in her name.

Susan and Kerry issued proceedings in the Supreme Court seeking to enforce the Binding Death Benefit nomination.  There was over $900,000 from Maxwell Morris' accounts in the super fund at stake.  The Court upheld their claims in full and ordered costs and interest against Patricia and Upper Swan.  However, Susan and Kerry had to wait over three years and incur the stress and financial strain of bringing a court action to recover what was rightfully theirs.

What could Maxwell Morris have done differently?  

The best thing he could have done was establish the super fund with a corporate trustee - perpetual succession of the corporate entity deals with the issue of survivorship of individual trustees, or loss of legal capacity which is often an issue with ageing trustees. Maxwell Morris could have bequeathed his shareholding in the trustee company to his chosen beneficiary, thus preserving his control over the entity.  In this case, Patricia Morris alone held the purse strings after Maxwell's death and there wasn't anything that Susan and Kerry could do about it after Maxwell had died, even though they were fully entitled to all his benefits in the fund.  

If your fund doesn't have a corporate trustee, you can still adequately deal with the issue of trustee succession by specific provision in the trust deed for appointment of a replacement trustee on death or incapacity.  It's relevant to know the procedures such as obtaining consent of the replacement trustee ahead of time and whether the decision of the remaining trustee or trustees is determined by the majority account balance holder or another provision in order to avoid deadlock or unsatisfactory decision making.  Needless to say, you still need to have a current Will nominating the right legal personal representative for you, and you should always have a current Enduring Power of Attorney in place to deal with your personal assets.  

Sage Advisers generally recommends the preferable structure for SMSFs is to have a corporate trustee and encourages clients regularly to review the death benefit nominations of all SMSF fund members.  We work together with clients' solicitors to structure things correctly at the outset, and review them along the way.

Tax breaks in the "Age of Personal Responsibility"

Treasurer Hockey has called an end to the "Age of Entitlement", see here. Describing the SPC decision as a signal to the rest of the country that past practice no longer applied, Hockey said it was up to businesses to take all necessary steps to get their own houses in order before the last resort of seeking a government bail-out.

''The age of entitlement is over. The age of personal responsibility has begun.''

'I say to you, emphatically, everyone in Australia must do the heavy lifting now'.

No-one's quite sure how this will all pan out. SPC is the current target politically, however there are big dollars up for grabs if policy changes are made to the tax treatment of superannuation and other concessions such as the 50% discount on capital gains tax and the CGT exemption of the family home.

Chris Richardson, economist with Deloitte Access Economics has estimated together these tax breaks amount to $66 billion in the coming year. The Abbott government has indicated that there will be a review of taxation in a white paper later in 2014.

Richardson states he considers the superannuation concessions to be necessary but not equitable and need to be revisited, in accordance with the recommendations of the 2012 Henry Review.  We have previously covered the range of changes proposed during 2013 to superannuation earlier in this blog. The main argument made by proponents for change in this area is one of equity. The poor pay more in a flat tax treatment and the rich benefit more.  The contrary argument is that when the rich make more money, this benefits everyone by their paying more tax overall; effectively growing the pie as well as encouraging people to save.

The combination of the capital gains discount, the ability to negatively gear rental properties, state stamp duties and land taxes also came under scrutiny in the Henry review. The then Rudd government ruled out any tinkering with negative gearing or the 50 per cent capital gains tax discount. But the review had recommended a broad-based land tax to replace “inefficient” property taxes.

Both the Institute of Chartered Accountants in Australia (ICAA) and CPA have made recommendations recently in these areas, such as restricting lump sum withdrawals from superannuation and encouraging income streams as a viable alternative.  Both associations have indicated the desirability of a systemic approach rather than piecemeal reform.

We consider the government should:

• apply GST to all spending except wages;
• broaden the land tax base;
• abolish stamp duty and payroll tax;
• increase the progressive personal income tax thresholds;
• raise pensions and income support for those who need them; and
• leave superannuation alone.  It has been modified and tinkered with too many times and another change would further erode confidence in the system.

These policies are unlikely to be implemented across the board. However, they would achieve, and reach sooner, the outcome of a balanced budget instead of passing on ever increasing deficits to the next generation.  And this would be the real "Age of Personal Responsibility".