Philip La Greca

On 28 February 2023 a joint press release from the Federal Treasurer & Assistant Treasurer announced a proposal to impose an extra tax on superannuation benefits of more than $3 million from 1 July 2025. The release was followed by a factsheet from the Treasury on how the proposed measure would work.

The new 15% tax will impact anyone who has a Total Superannuation Balance of more than $3m which is not indexed.  The tax is in addition to any tax their superannuation funds pay on earnings in accumulation phase. As a result, earnings linked to balances above $3 million will generally be subject to a combined headline rate of 30%.

Individuals will have a choice to pay the tax out of pocket or draw from their superannuation funds. If an individual is a member of more than one superannuation fund, they can choose which fund will pay the tax.

The announcement has stirred an uproar in the industry as an unindexed cap of $3m  is estimated to impact more than the 80,000 individuals when the extra tax commences in 2025.

History repeats

Of course, this not the first time we have had hard/soft caps on superannuation benefits. In the past, limits applied to benefits which were linked to a person’s salary and if too much had been accrued then any income earned on the excess was taxed at the top marginal tax rate.

The superannuation changes in 2007 abolished both compulsory cashing of benefits and penalty taxes on excess benefits. From 1 July 2007 pension payments that were previously taxed up to 49% became tax exempt and could commence at the option of the individual. This continued with the 2017 super changes, however, a Transfer Balance Cap (TBC) was introduced to regulate the amount that could be used to commence pensions in retirement phase.  Any amounts in excess of the TBC were allowed to remain in the fund until the individual’s death.

How is it calculated?

The new 15% tax is not an increase on the tax rate on the individual’s taxable income. Instead, the tax applies to a portion of the individual’s earnings on their superannuation balance.

The calculation has 3 components:

An example (from Treasury factsheet)

Scenario: Louise is 40 and working. At 30 June 2026, she has a balance of $2 million in an APRA-regulated fund, and a balance of $3 million in an SMSF. At 30 June 2025, the balance of her APRA-regulated fund was $1.9 million and the balance of her SMSF was $2.9 million. She does not meet a condition of release, so she has no withdrawals during the year. She makes $20,000 of concessional contributions into her SMSF. Her contributions net of tax on contributions is $17,000.

Calculation:

Louise elects to pay $5,000 from her APRA-regulated fund and $5,980 from her SMSF.

The additional 15% tax will not be calculated by each superannuation fund but is assessed by the ATO after all TSB data is lodged. This could mean an earlier SMSF lodgement date, as there will be an incentive for funds to lodge as late as possible to defer the payment of the extra tax.

Unrealised Capital Gains

The calculation of an individual’s TSB has always included unrealised capital gains as a member’s balance includes the market value of the investments on 30 June. The are several other important rules using unrealised gains which are incorporated in TSB – notably the rules for bring forward non-concessional contribution and carry forward concessional contributions.

Given the use of TSB for purposes of the new tax, SMSFs could move towards using tax effective accounting to incorporate a tax provision on unrealised capital gains.  This may lower the member’s balances in the fund and ensure any of the “excess” tax applies only on net capital gains. The use of tax effect accounting may bring SMSFs into alignment with APRA funds which are required to ‘mark to market’ and provide for future capital gains tax.

The alternative could be to exclude unrealised capital gains from member balances.  In doing so some form of unallocated reserve would need to be created and appear in the fund accounts.  This would allocate capital gains to a member’s balance only after they have been realised. However, allocation in this way would be inequitable to those members who joined prior to the acquisition of an asset and have left the fund before it has been sold.

Unrealised capital gains are also used in calculating unit prices for practically all the unit trust investments by superannuation fund. There are various existing fees and charges imposed by the state governments and private sector businesses that use market values which include unrealised capital gains.

For most of the affected individuals who meet a condition of release there are no restrictions under the superannuation rules to withdrawing amounts from superannuation. The downside appears to be the crystalisation of unrealised capital gains as the fund needs to take the tax liability into account for any withdrawal including in-specie transfers otherwise the calculation of the TSB is distorted.

Other matters to consider include:

• pension payments in the calculation of the net withdrawal seem a little inappropriate given some of those withdrawals, such as compulsory minimum pension payments, are not voluntary, whereas most contributions received by the fund are voluntary,
• clarification of the definition of net contributions, and whether adjustments to concessional contributions include the notional 15% tax rate irrespective of the super fund’s effective tax rate,
• whether an exception will continue for structured settlement payments, as they are currently excluded from TSB calculations, and
• the headline rate of 30% in some ways claws back some of the $3.3 billion in franking credits received by the SMSF sector which according to the ATO stats for 2020 resulted in a $1.4 billion tax benefit.

Possible improvements to the current proposal

1. The clear focus of the proposal is on accumulation accounts particularly as the 2007 changes meant they have been able to sit in superannuation post age 65 and grow with concessionally taxed earnings. The lack of indexation of the $3 million cap could result in more people being caught by this measure, as member balances grow.
2. Bring back a compulsory cashing point, that is an age at which superannuation monies must be accessed, or introduction of a mandatory pension age. This could apply from age 75, when most contributions to super effectively cease. Pensions would be subject to TBC limits and statutory drawdown rates.

This measure will not commence until the 2025-26 financial year, which will hopefully provide plenty of time to achieve the right intended outcomes, so in the words of Douglas Adams – DON’T PANIC.

By Philip La Greca, Executive Manager SMSF Technical and Strategic Solutions

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Philip La Greca

Self-managed super fund (SMSF) technology and administration provider SuperConcepts has released the latest SMSF Investment Patterns Survey which indicates a possible resurgence in term deposits as official interest rates rise.

The survey covers over 4,400 funds, a sample of the SMSFs administered by SuperConcepts, and the investment they held at 31 December 2022 which exceeds $7 billion in assets.

According to SuperConcepts Executive Manager Technical and Strategic Solutions, Philip La Greca, cash is king with few other options for liquidity.

“We’ve seen a 10% lift in extended term deposits during Q4 2022,” La Greca said, “and it would appear short-term term deposits are still unattractive for investors.”

With the decreasing average age for an SMSF trustee, expect to see significant change in the allocation of investments aligned to a younger demographic in the upcoming years.

Investments such as ETFs prove to be on the rise, but the current environment has left SMSF trustees with few options in terms of investment choices for immediate liquidity.

Findings from this quarter also highlight that fund managers are exploring different investment structures.

“Whilst pooled investment structures still have the lion’s share of international equities, it’s interesting to see that fund managers are branching into different structures to penetrate other sectors as well.”

Property continues to hold its own, with nearly 85% of exposure through direct holdings and all growth in this sector is attributed to the direct subset.

“It will be interesting, however, to observe whether there is a reported decline here in our next quarter’s report as valuations for 30 June 2022 and later appear,” La Greca notes.

Although there is a lot of commentary and questions surrounding “exotic” investments, such as cryptocurrency and collectables, these asset types only equate to 0.1% of the total investment pool.

The results from surveys such as this are crucial to our understanding of the sector as there is limited regular statutory reporting by SMSFs.

Read the report.

The post Valuable SMSF investment insights released for Q4 2022 appeared first on AdviserVoice.

Nicholas Ali

Self-managed superannuation (SMSF) education, administration and software provider, SuperConcepts, continues to expand their SMSF offering with the addition of specialist consultation services.

Available to both individuals and professionals, including accountants and advisers, the service follows a basic fee structure and can be commissioned on an hourly basis for $385 (excluding GST).

“Our expert team of SMSF specialists comprise some of the Australia’s most renowned and sought-after technical minds,” General Manager Growth, Annette Sheppard said.

The nature of the SMSF lifecycle means that technicalities, complexities and issues arise periodically, and specialist assistance can be required on an ad-hoc basis.

“These consultation services make the team accessible to those in the industry as and when required,” Executive Manager, SMSF Technical Specialist, Nicholas Ali explained.

Consultation matters may include death, divorce and estate issues, the examination and compliance of asset treatments, remediation services and general SMSF health checks.

“We can help individuals and professional navigate the complexities of SMSFs without the need to have a specialist on retainer,” Ali said.

“By working through issues strategically we can support the decision-making process and, most importantly, ensure compliance.”

Led by Nicholas Ali, SuperConcepts’ technical education team include Graeme Colley, Philip La Greca and Anthony Cullen.

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Philip LaGreca

Self-managed super fund (SMSF) technology and administration provider SuperConcepts has relaunched their SMSF Investment Patterns Survey with findings for March 2022 after a harmonisation of internal systems.

The report presents a quarterly analysis of SuperConcepts’ client investments to get a closer insight into how SMSF trustees invest and to identify emerging investments trends.

The survey covers over 4,500 funds, a sample of the SMSFs administered by SuperConcepts, and the investment they held at 31 March 2022 which exceeds $7.5 billion in assets.

SuperConcepts Executive Manager Technical and Strategic Solutions, Philip La Greca, said one of the key takeaways from this survey is that almost 1 in 3 dollars are invested through pooled structures.

“The highest usage is in international sectors with over 75% of international equities and international fixed interest exposure is through Managed Funds and ETFs.

“This is reflected in the top ten pooled vehicles where eight are international products and four are ETFs.”

The findings also highlight the differences in SMSF investment allocations compared to that of APRA funds, some of which La Greca said were unsurprising.

“Cash is higher but, given the larger proportion of pension members, this is not really unexpected.”

The discrepancies can be attributed to the investment exposure granted to each fund type.

“Equities exposure is almost identical but the split between domestic and international highlight the limited ways SMSFs, and other retail investors, can access overseas markets.”

La Greca questions whether SMSFs have a greater exposure to real property, 16% vs 8.5%, because assets such as airports, toll road and ports are classified as infrastructure, 4.9% vs 9%, rather than specialist property by APRA funds.

Findings from surveys such as this are crucial to our understanding of the sector as there is limited regular statutory reporting by SMSFs.

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Philip LaGreca

The latest findings from the SuperConcepts SMSF Investment Patterns Survey revealed a spike in the allocation of lump sum versus pension payments (19 per cent versus 81 per cent) in the first quarter of 2018.

This is a reversal of trends from previous quarters which saw on average 10 per cent of payments as lump sums and 90 per cent as pension payments.

Contribution levels declined during the March 2018 quarter, with average amounts falling from $3,611 in the December quarter to $3,498 in March 2018.

Continuing a downward trend seen in the past three quarters, the latest SuperConcepts SMSF Investment Patterns Survey highlights the ongoing impact of the 1 July 2017 super reforms. Under the new super rules, the total value members can hold in existing tax-free pension accounts cannot exceed $1.6 million and new reduced contribution caps apply to member balances.

Commenting on the findings, SuperConcepts Executive Manager Technical & Strategic Solutions Phil La Greca, said the large increase in lump sum payments was likely a response to the 2017 super reforms.

“Trustees are looking to manage the new $1.6 million pension transfer balance cap requirements by implementing lump sum benefit payments. This is because lump sum payments taken from pension accounts will be recorded as debits on the members transfer balance account.”

The March 2018 quarter also saw a continued rise in popularity of international managed funds, with two investment pooled structures used for accessing international equities, ranking in the top five largest investment holdings. The increase can in part be explained by the fall in price of all the major banks.

Looking ahead to the next quarter Mr La Greca said, “We could see an increase in the level of concessional contributions in the June 2018 quarter as this will be the first year that allows anyone under the age of 65 to be able to claim a tax deduction on personal contributions.

“We also expect that the trend towards higher lump sum payments will continue as individuals drawing more than the statutory minimum pension amount will have reached this level and all additional payments will be treated as lump sums.”

The quarterly SuperConcepts SMSF Investment Patterns Survey covers approximately 2,600 funds, a sample of SMSFs SuperConcepts administers and the investments they held at 31 March.  The assets of the funds surveyed represent approximately $3.1 billion.

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Philip LaGreca

SMSF trustees are reducing their exposure to the top 10 stocks and increasing investments in international equities through managed funds, according to the latest Multiport SMSF Investment Patterns Survey.

In the December 2015 quarter, there was a significant move away from the S&P top 10 shares, which now represent 14.5 per cent of total fund assets, compared to 20 per cent in December 2014.

Multiport Head of Technical Services, Philip La Greca said trustees are searching for capital growth and yield outside well-known stocks.

“We’ve seen an increase in allocation to international equities, specifically through managed funds. A large contributor is likely to be distributions from managed funds at 30 June being re-invested during the December quarter. Trustees are also searching for opportunities that provide more capital growth and yield.

“While it’s a positive sign of increasing diversification by SMSF trustees, it’s also reflective of the under performance of the ASX top 20 compared to the overall equity market for the period.

“Despite the increase in international investments, the most common assets held by SMSF trustees continue to be stocks in the ASX top 20, so there remains an opportunity for further diversification,” Mr La Greca said.

Investments in Australian shares represent 35.4 per cent of all assets held at 31 December 2015, a reduction from 41.6 per cent in December 2014. During the same period, investments in cash and short term deposits increased from 16.5 per cent to 18 per cent of all assets held.

“Earlier in 2015, we saw a reduction in cash holdings with many SMSF trustees not renewing their term deposits due to the low interest rate environment.

“However, we’ve seen cash holdings increase over the last quarter following distributions from managed funds. While some of this cash has been re-invested in international equities and fixed interest, there were also a higher number of trustees increasing their cash reserves as a result of market volatility,” Mr La Greca said.

The December 2015 quarter saw a decrease in the average contribution per fund to $6,393 compared to $9,380 from the previous quarter. The average concessional contribution was $2,278 for the period, compared to $2,198 for the previous quarter.

“While the average concessional contribution increased over the quarter, we did see a reduction in non-concessional contributions which is consistent with the time of year,” Mr La Greca said.

Despite the cooling property market in late 2015, SMSF property borrowing marginally increased to 17.5 per cent in the December quarter compared to 16.5 per cent during the previous quarter among the survey base.

“One-third of survey respondents who own property in an SMSF had a gearing arrangement in place during the period. The average property loan amount was $298,000, an increase from $273,000 in the first quarter of 2015, which is reflective of the rise in property prices during the year,” Mr La Greca said.

The quarterly Multiport SMSF Investment Patterns Survey covers approximately 2,850 funds, a sample of the SMSFs Multiport administers and the investments they held at 31 December 2015. The assets of the funds surveyed represent approximately $3 billion.

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Philip LaGreca

SMSF trustees are improving their portfolio diversification with a significant increase in allocation in international shares during the first quarter of the year, according to the latest Multiport SMSF Investment Patterns Survey.

In the March 2015 quarter, holdings in international shares increased to 14.4 per cent, a 1.9 percentage point increase compared to the previous quarter. The flow of funds into international shares has seen allocation to Australian equities drop to a year-low of 38.6 per cent, down from 41.6 per cent the previous quarter.

AMP SMSF Administration Head of Technical Services Philip La Greca said the increase in international share holdings is a positive sign of increasing diversification.

“We’ve seen a significant amount of SMSF trustees take their profits from Australian equities following the dividend declaration season and re-invest into the international share market, most often through pooled vehicles.

“SMSF trustees are looking for new growth opportunities for investment, with an increasing focus on international markets. Due to the complexity of investing overseas directly, managed funds continue to be the preferred vehicle to invest overseas with 88.2 per cent of trustees investing in pooled structures.

“Due to the decrease in allocation to Australian equities, we have seen a significant drop in SMSF exposure to the most commonly held investment. While the major banks and Telstra remains the top of the list for investment, the representation of top 10 stocks in SMSF portfolios has reduced from 19 per cent to 16.8 per cent during the first quarter,” Mr La Greca said.

The first quarter of 2015 also saw the average contribution inflow per fund decrease from $13,715 in the December 2014 quarter to $6,120 in the March 2015 quarter, which is typically the lowest quarter in the financial year for SMSF contributions.

“We’ve also seen the average pension payment made by SMSFs decrease significantly for the quarter, dropping from $21,105 in December 2014 to $11,588 in March 2015, however this is largely in-line with the March quarter from previous years,” Mr La Greca said.

While the property market in some parts of Australia has continued to grow strongly, borrowing in an SMSF for a property purchase remains stable at 17.5 per cent, only a slight increase from the previous quarter at 16.1 per cent.

“Around 37 per cent of all property holders have a gearing arrangement in place, only a slight increase from 35.9 per cent in the last quarter. The average loan amount for property purchases increased $10,000 from the previous quarter to $273,000,” Mr La Greca said.

The quarterly Multiport SMSF Investment Patterns Survey covers around 2250 funds, a sample of the SMSFs Multiport administers and the investments they held at 31 March 2015. The assets of the funds surveyed represent approximately $2.6 billion.

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Philip LaGreca

With continued declines in interest rates and positive gains in the stock-market, self-managed super fund (SMSF) trustees have moved more of their cash holdings into managed funds and international equities, according to the latest Multiport SMSF Investment Patterns Survey.

In the December 2014 quarter, holdings in cash declined to 16.5 per cent, a 0.5 percentage drop compared to the previous quarter, while investment in equities increased to 54.1 per cent, up 3.8 per cent over the year, signalling trustees are searching for higher returns and growth opportunities in their fund.

AMP SMSF Administration Head of Technical Services Philip La Greca said investment in equites and managed funds is continuing to increase given the low returns in other asset classes, especially cash and term deposits.

“There’s lots of opportunity for growth in the current market and SMSF trustees are adapting their portfolios to align to growth areas. In the December quarter, we saw a significant rise in the amount of people using managed funds in their portfolio to increase exposure to international markets. Managed funds now represent 19.5 per cent of total SMSF assets.

“We know that SMSF trustees are interested in investing in international markets, however many feel they don’t have the level of knowledge or experience required to invest overseas directly. A managed fund is a good way for trustees to access global markets without the complexity. Reflecting this demand, six out of the top ten managed funds in which trustees invest are international funds.

“Domestic equities continue to be popular for SMSF trustees, with the major banks and Telstra continuing to top the list of most commonly held investments based on dollars invested. For the first time, we’ve also seen an ETF enter the list of top-ten investments, indicating the increasing use of pooled investments by SMSF trustees,” Mr La Greca said.

The trend for SMSF trustees not to renew term deposits has continued during the quarter as a result of low interest rates and unattractive returns.

“Each quarter, we are seeing investments in cash drop to a new record low, which isn’t surprising given current interest rates. Despite cash being an important strategy for those nearing retirement, we’re continuing to see trustees decide to invest in asset classes with higher returns,” Mr La Greca added.

In a positive sign Australians are saving more for their retirement, contribution amounts are increasing significantly, up 92.3 per cent over a two-year period. In December 2014, the average contribution per fund increased to $13,715 per quarter compared to $10,830 the previous year and only $6,585 in the December 2012 quarter.

“The average contribution per fund is a positive sign that people are saving more for their retirement. This increase would also be influenced by the increase of the superannuation guarantee to 9.5 per cent and the effective use of contribution caps,” Mr La Greca said.

Despite continued strength in the property market and concerns of an overheated market, borrowing in an SMSF for a property purchase remains stable at 16 per cent, only a slight increase from the previous quarter at 14.8 per cent.

“At the end of December 2014, only 35.9 per cent of all direct property holders had a gearing arrangement in place, up from 34.4 per cent the previous quarter. The average loan amount for property purchases was $263,000 signalling the use of LRBAs by SMSF trustees is stable,” Mr La Greca said.

The quarterly Multiport SMSF Investment Patterns Survey covers around 2500 funds, a sample of the SMSFs Multiport administers and the investments they held at 31 December 2014. The assets of the funds surveyed represent approximately $2.7 billion.

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Philip LaGreca

Despite recent  downturns in the domestic share market, self-managed super fund (SMSF) trustees  have increased their investments in Australian equities to boost long-term gains, while cash holdings continue to decline to a record low, according to  the latest Multiport SMSF Investment Patterns Survey.

In the September  2014 quarter, cash holdings within SMSFs continued to fall by another 1.3  percentage points to 17%, representing the lowest level since the Multiport  survey began in 2007. Conversely, investment allocation to Australian equities  increased by 1.5 percentage points signalling funds have flowed from cash to  this asset class.

AMP SMSF  Administration Head of Technical Services Philip La Greca said low interest  rates continue to make cash less attractive as an investment, resulting in  trustees not renewing term deposits at maturity.

“While overall cash  holdings are declining, it’s term deposits that have seen the biggest decline  as an investment vehicle over the past 12 months, reducing from 7.6% in  September 2013 to 5.3% in September this year. With no sign of term deposit  rates increasing in the near-term, we’ll likely see cash holdings continue to  decline,” Mr La Greca said.

“In previous  quarters we have seen investors move their funds to international equities to  realise more gains, however over the past quarter the majority of funds have  been moved from cash to Australian equities, which now accounts for 41.8% of  overall asset allocation. Despite a recent downturn in the domestic market, it  appears SMSF trustees are overall optimistic about long-term gains in  Australian equities,” Mr La Greca added.

The allocation to  international shares has also remained consistent at 11.7% of overall assets,  with managed funds continuing to be the preferred method in investing of  investing in overseas markets due to the complexity of direct investing  overseas.

Interestingly, the  asset allocation to property declined 1.5 percentage points in the past quarter  despite the popularity of property purchases in an SMSF. The overall asset  allocation to property in an SMSF, including direct, listed property and within  managed funds now sits at 16.3%.

“Around 14.8% of  SMSF trustees are currently using a borrowing arrangement in their SMSF, a  slight decline from 15.6% in the previous quarter. The portion of SMSFs with  direct property investments that are using a Limited Recourse Borrowing  Arrangement also declined by 3.1 percentage points to 34.4%,” Mr La Greca said.

In a positive sign  Australians are saving more money for their retirement, the average  contribution for the September quarter reached $12,125, which is much higher  compared to previous years with $9,417 for September 2013 and $8,732 for  September 2012.

“The increase we’ve  seen in contribution levels is most likely the result of the increase in the  Super Guarantee to 9.5% and indexation of both the concessional and  non-concessional contributions cap,” Mr La Greca said.

The quarterly  Multiport SMSF Investment Patterns Survey covers around 2500 funds, a sample of  the SMSFs Multiport administers and the investments they held at 30 September  2014.  The assets of the funds surveyed  represent approximately $2.6 billion.

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