Mr Swan announced the following superannuation-related changes:

• Super contributions surcharge for high-income earners. Doubling of the contributions tax to 30% (from 15%) for individuals earning more than $300,000 (see SuperGuide article Super stupid! Super tax for rich will hit everyone).
• Removal of over-50s concessional contributions cap. Deferring the over-50s concessional cap until July 2014, which means the concessional cap for over-50s reverts to $25,000 from July 2012 (see SuperGuide article Another super con: Over-50s contributions cap removed).
• Cancellation of proposed policy to give 50% tax discount on interest. Now cancelled, up to $1000 in interest on savings account were to be taxed concessionally (see SuperGuide article Swan backtracks again on tax discount for savings products).
• SG to increase to 12%. Earlier in 2012, the Federal Government passed legislation to gradually increase Superannuation Guarantee contributions to 12%, starting with 9.25% from 1 July 2013 (see SuperGuide article Superannuation Guarantee set to jump 33%).
• Introduction of super tax refund for lower income earners. Earlier in 2012, the Federal Government passed legislation to introduce a Low Income Super Contribution, effective from 1 July 2012.
• Golden handshakes taxed more. From 1 July 2012, an individual will only receive the ETP tax offset on an ETP that takes an individuals’s total taxable income to no more than $180,000. Any amounts above this amount will be taxed at the person’s marginal tax rate.
• Mature Age Worker Tax Offset (MAWTO). From 1 July 2012, the MAWTO will be phased out for individuals born on or after 1 July 1957.  If you are 55 years or older during the 2011/2012 year, then you remain eligible. A work bonus will replace MAWTO.
• Medicare levy low income thresholds. From the 2011/2012 year, the Medicare levy low income thresholds will be increased (see SuperGuide article For your convenience: Income tax rates for the 2012/2013 year).
• Online registration for SMSF auditors. ASIC to develop and maintain online registration system for SMSF auditors. ASIC will be developing a competency exam for SMSF auditors.
• Levy on large super funds. Imposing a SuperStream levy on large (non-SMSF) super funds to meet the ATO costs of implementing new administrative processes to make it easier to automatically consolidate inactive super accounts, to standardise processes for employers dealing with super funds and to facilitate greater use of tax file numbers. The levy will be collected by APRA and total nearly $500 million over 6 years.
• CGT relief for fund mergers. Capital gains relief will be available to large super funds seeking to merge.

Other super changes

In November 2011, Mr Swan also announced some superannuation changes, namely:

• Freezing of contributions caps for 2012/2013 and 2013/2014 years
• Halve co-contribution payments and reduce income threshold for eligibility from 1 July 2012
• Changes to the yet-to-be-introduced Low Income Superannuation Contribution (LISC) (to be introduced from 1 July 2012) to exclude some low-income earners
• Extend 25% minimum pension payment relief for 2012/2013 year.

I explain the November 2011 announcements in the SuperGuide article Remember earlier Swan attack – freeze contributions caps and halve co-contributions.

But wait, the Federal Treasurer Mr Swan has announced that he has only deferred the over-50s for two years. What this supposedly means is that for the 2012/2013 and 2013/2014 years, the maximum amount of concessional contributions that anyone can make (and not be charged excess contributions tax) is $25,000 a year. From July 2014, those with account balances of less than $500,000 will then be able to make up to $50,000 in concessional contributions each year.

From July 2014, the ATO is expected to have some whiz-bang online reporting facility that will make it easier to find out the size of your account balance at a certain date, to enable those with account balances of less than $500,000 to access the higher concessional cap from July 2014.

I have published my views on this website before but briefly I consider the delays in introducing the contribution rules unacceptable especially when the Government is implementing such an ill-conceived, unfair and simply bad policy. The proposed change to the contributions cap was always about politics, not policy and you can thank former Prime Minister Kevin Rudd and Treasurer Wayne Swan, for the ‘itsy bitsy, sometime in the future when I won’t be around, or the public won’t care anymore’ nature of law making. My view continues to be that we need to get rid of the $500,000 account balance threshold for over-50s and make it a simple and straightforward $50,000 cap for everyone over 50.

Do you believe Mr Swan when he says the over-50s concessional cap has been deferred, rather than removed? I don’t think I do based on Mr Swan’s track record of promising policy changes and then breaking his promises, or minimising the policy change, or deferring the policy, or freezing indexation for years on end.

Here’s why I don’t believe that the over-50s cap will return while Mr Swan is Treasurer:

• May 2009 Federal Budget:Halving of over-50s contributions cap from $100,000 to $50,000 taking effect from July 2009, with the over-50s cap reverting to $25,000 from 1 July 2012. Before the 2009 Budget changes were released, the Government had announced that the concessional cap of $50,000 was to be increased to $55,000 from July 2009. If the Government was sincere about only halving the before-tax limit, the concessional cap should really have been $27,500 from July 2009.Mr Swan not only halved the caps, he froze the indexation of the caps for the 2009/2010 year.
• Before the 2009 Budget changes were released, the Government had announced that the non-concessional (after-tax) contributions cap was to increase to $165,000 for the 2009/2010 year, and the bring-forward cap was to increase to $495,000 from $450,000. (If you take advantage of the bring-forward rules, then you can make up to three years of non-concessional contributions in one year, representing your non-concessional cap for the current year and following two years.). By stating that the annual non-concessional cap was to remain at $150,000 the Government had effectively cut the cap by $15,000 for the 2009/2010 year, and the bring-forward cap cut by $45,000, and started the indexation period from the 2009/2010 year which meant any increase due to indexation wouldn’t happen for a few years. This ‘swifty’ was not mentioned anywhere in the 2009 Budget documents.
• May 2010 Henry Tax Review and May 2010 Federal Budget: The Government’s response to the Henry Tax Review included announcing that Australians aged 50 or over retain the $50,000 cap for concessional (before-tax) contributions, subject to satisfying certain conditions. The concessional cap for over-50s was supposed to revert to $25,000 (or the indexed amount if applicable) from July 2012, but the Federal Government publicly stated that it appreciated the harshness of removing the opportunity for mature Australians to play catch-up with super contributions. I wrote at the time that cutting the concessional contributions cap for over-50s was always bad policy because for many Australians, reaching the age of 50 and beyond is often the only opportunity that you have to make substantial contributions to super due to other financial commitments in your younger years; such as mortgage repayments, raising children and school fees. The special condition is that to continue to access the $50,000 concessional cap, your superannuation account balance must be less than $500,000.
• 2011/2012 Mid-year Economic and Fiscal Outlook: In November 2011, Mr Swan announced that the concessional caps would not be indexed until July 2014, further restricting the opportunity for Australians to contribute to super.
• 2012 Federal Budget: Effective from July 2012, Mr Swan has removed the over-50s concessional cap until at least July 2014.

Remember this: In June 2009, over-50s were permitted to make up to $100,000 a year in concessional contributions. At the end of June 2012, a mere three years later, the maximum amount that a person aged 50 years of over can contribute as concessional contributions (including compulsory Superannuation Guarantee contributions) is $25,000 a year, and that cap will not be indexed until July 2014.

In November 2011, Mr Swan announced three superannuation changes that will negatively impact on the super savings of Australians. He also announced a one-year extension to a measure that would relieve some of the financial pressure for retired Australians.

The superannuation changes announced in November 2011 were:

• Freeze indexation of contributions caps for the 2013/2014 year (but also for the 2012/2013 year).
• Halve co-contribution payments and reduce income threshold for eligibility from 1 July 2012
• Changes to the yet-to-be-introduced Low Income Superannuation Contribution (LISC) (to be introduced from 1 July 2012) to exclude some low-income earners
• Extend 25% minimum pension payment relief for 2012/2013 year, in addition to the 2011/2012 year.

In an attempt to protect the 2012/2013 Federal Budget surplus which was promised after the Global Financial Crisis savaged world economies, and then re-promised in the May 2011 Budget, Federal Treasurer Wayne Swan tinkered with the super rules, yet again. On 29 November 2011, Wayne Swan released the 2011/2012 Mid-year Economic and Fiscal Outlook. As part of this Outlook, Mr Swan announced the changes listed above.

I explain each of these November 2011 changes below.

Freeze indexation of contributions cap for the 2012/2013 and 2013/2014 years

I believe this policy change is ridiculous for two reasons. First, the Government is not being honest about the length of time the freezing of the caps is to last. In the Mid-year Outlook it stated that the concessional cap will be frozen for the 2013/2014 year and remain at $25,000, when the Government then expects the cap to increase to $30,000 from the 2014/2015 year. My understanding is that the concessional cap was to increase to $30,000 from the 2012/2013 (from July 2012) and not from 2013/2014 year, which means the Government is freezing the caps for 2 years. I remind our SuperGuide readers that the contributions caps were not indexed when they were supposed to be in July 2009. Instead the Government halved the concessional (before-tax) contributions caps and then announced indexation of both caps would commence from July 2009 (and now the over-50s cap is going to be $25,000 – see SuperGuide article Another super con: Over-50s contributions cap removed).

By taking this approach the Government has not only frozen indexation but rolled back accumulated increases in the cap that would trigger an adjustment in the caps. Since the new caps were originally introduced in July 2007, the contributions caps have never been adjusted in line with inflation. Some may consider this trend to mean the contributions caps are on a permanent freeze.

Note: The over-50s concessional cap (since removed in the May 2012 Budget) and the non-concessional cap will also be frozen for 2 years, even though the Government states the non-concessional cap is frozen for only one year.

The second reason why I think this policy change is ridiculous is that we currently have tens of thousands of Australians paying excess contributions tax due to poorly implemented contributions caps. The amount the Government is collecting in unfairly imposed excess contributions tax should be enough suffering by super savers ‘for the budget surplus cause’, rather than tinkering with the contributions caps again (and yet again in the May 2012 Federal Budget by removing the over-50s concessional contributions cap and hitting high-income earners with extra contributions tax).

Fix the excess contributions tax issue first before upsetting the retirement plans of Australians yet again.

Note: The Government estimates the freezing of the contributions caps will save $485 million over 2 years.

Cut co-contribution payments by half from 1 July 2012

In November 2011, the Government also announced that it will halve the matching rate (currently $1 co-contribution for $1 voluntary non-concessional contribution up to a maximum amount) and halve the maximum co-contribution payment (currently $1,000 which was recently reduced from $1,500). What this means is that the Government will halve the co-contribution matching rate to 50 cents for every dollar contributed, and the maximum co-contribution payment will fall to $500. In other words, eligible Australians who contribute up to $1,000 in non-concessional contributions will receive a maximum co-contribution of $500.

I remind our SuperGuide readers that the Government has previously announced that the maximum co-contribution payment would increase to $1,250 for the 2012/2013 and 2013/2014 years and then eventually return to $1,500 from 1 July 2014. The Government also froze the income thresholds for co-contribution eligibility for the 2010/2011 and 2011/2012 years. The co-contribution will never return to $1,500 and it will never return to $1,000 after this year.

That’s not the end of the bad news. The Government also intends to lower the income thresholds for testing an individual’s entitlement to a co-contribution. The current income thresholds are $31,920 (lower) and $61,920 (upper). From 1 July 2012, if you earn more than $46,920 you will not be entitled to a co-contribution, although it appears that the lower threshold is remaining at $31,920 for the moment. The Government believes the Low-Income Superannuation Contribution (see next policy measure below) is a better policy and will help more low-income earners.

I agree that the Low Income Superannuation Contribution (LISC) is a fair and long-awaited policy but if it is being introduced to replace the co-contribution, why is the co-contribution cut being announced as a budget measure to reduce expenditure (by a whopping $1 billion over 3 years) in order to keep the Government in surplus? For goodness sake, at least be honest about the destruction of the co-contribution scheme to meet the surplus rather than attempting to make it some noble decision that makes those affected better off. And now, from July 2012, we have only one concessional contributions cap for all ages (see SuperGuide article Another super con: Over-50s contributions cap removed).

Note: The co-contribution cuts are designed to fund a third of the cost of the LISC policy. The Government estimates that by cutting the co-contribution it can save $660 million (but didn’t I read $1.023 billion in the estimates?) which is around one-third of the cost of the low income superannuation contribution ($1.9 billion over 3 years).

Changes to Low Income Superannuation Contribution (LISC)

In its response to the Henry Tax Review, the Federal Government announced that from 1 July 2012, individuals earning up to $37,000 will be no worse off tax-wise by receiving Superannuation Guarantee contributions. Any tax deducted from superannuation guarantee (SG) contributions made on behalf of individuals earning less than $37,000 will be returned to the super accounts of the affected individuals.

In November 2011, the Government announced some changes to the implementation of this policy which I will explain after I outline how the LISC works In the past, SuperGuide has flagged that Australians earning less than $37,000, that is, those paying 15 cents tax or less in the dollar, received no tax incentives to save for retirement. In some cases, Australian workers who paid less than 15 cents in the dollar income tax, ended up being penalised tax-wise by the superannuation system. For example, you may not pay any tax on your personal income due to the level of income that you earn, but if your employer paid Superannuation Guarantee contributions into your super fund, those contributions were hit with 15% contributions tax. What this means, is that workers on lower incomes are being financially penalised by the superannuation system rather than receiving tax incentives.

Under the LISC policy, the 15 per cent contributions tax will be refunded into their superannuation accounts. Individuals can expect a refund of contributions tax of up to $500 each year, paid into the super accounts of Australians earning $37,000 or less, to ensure they receive a similar incentive for retirement savings, as Australians on higher incomes. According to the Federal Government, “The LISC will benefit over three times as many low-income earners as the current co-contribution, and is better targeted in boosting retirement savings. This is because low-income earners can only access the co-contribution if they make additional superannuation contributions from their income or savings, whereas all low-income earners who receive compulsory SG contributions will automatically benefit from the new initiative.”

Well, I’m not so sure that ‘all low-income earners’ will benefit from the LISC. The Government announced some changes to the LISC as part of its strategy to keep the budget in surplus. Those changes are:

• Individuals who receive less than 10 per cent of their income through employment or business will not be eligible, which means there will be many thousands of low-income earning Australians (more than 50,000 and probably more, on my calculations).
• Individuals only receive a payment if their LISC entitlement is at least $20, to reduce administration costs. This change is more understandable from a practical point of view, but from an equity point of view, this change means that there will still be many Aussie paying higher rates of tax on their SG payments than what they pay on their personal income. That doesn’t seem very fair to me, but in this instance the cost of paying out $10 or $5 would not justify the tax benefit.

A reasonably positive change to the LISC is that the Government has introduced a verification process to remove the requirement for low-income earners to lodge a tax return solely to receive the tax refund under the LISC. Instead, the Australian Taxation Office (ATO) will verify an individual’s income using available data. According to Government estimates, this small change in administration will ensure that an additional 100,000 individuals earning up to $37,000 will now receive the LISC.

Note: According to the Government, about 3.6 million Australians will receive a tax refund (but I bet you many of them would have preferred the $1000 or $1500 co-contribution that used to be available).

Extend 25% minimum pension payment relief for 2012/2013 year

According to the Government, “around 125,000 self-funded retirees will benefit from an extension of drawdown relief for account-based pensions to the 2012-13 year, with a 25 per cent reduction in the minimum payment amounts for these products” (Bill Shorten Media Release No 162, 29 November 2011) Previously, the Government halved the minimum payment amounts for account-based pensions for the 2008/2009, 2009/2010 and 2010/2011 financial years, and a 25% reduction is currently available for the 2011/2012 year. For more information on this measure, including specific minimum pension payment percentages, see separate SuperGuide article What a relief! Minimum pension payments reduced by 25% for 2011/2012 and 2012/2013 years

The tax discount policy was intended to allow Australians to claim a 50% tax discount for the first $1,000 of interest they earn, including interest earned on deposits held in banks, building societies and credit unions, and on bonds, debentures and annuity products.

The Federal Government claimed this new incentive would benefit around 5.7 million Australian depositors in the 2011/2012 year, and would cost just under $1 billion over 4 years.

Well, it never started from the 2011/2012 year because the ALP Federal Government decided to defer the tax discount policy until July 2012 (2012/2013 year) due to other funding priorities demanded by the independent MPs holding the balance of power in the House of Representatives.

In the May 2012 Federal Budget, Treasurer Swan has finally come clean with yet another policy deception and admitted that the 50% tax discount on the first $1,000 of interest earned on savings accounts was never going to happen.

With so many policies promised so far in advance, and with so many policies reversed or minimised, I wonder whether you can really trust anything published in a Wayne Swan budget unless it commences from 1 July 2012.

In July 2011, the federal government announced the introduction of a carbon tax on Australia’s biggest polluting companies. According to the government, more than half of the revenue raised from the carbon tax will be redirected to Australians in the form of tax cuts (for taxpayers) and a Clean Energy Supplement (for Age Pensioners and others). The tax cuts and supplement are designed to compensate Australians for the expected cost increases that will be passed onto consumers when the carbon tax is introduced from July 2012.

In the May 2012 Federal Budget, the Federal government announced further payments to taxpayers in the form of education bonuses, increases in family payments and other payments which are to be funded by not reducing the company tax rate as initially promised.

The tax rates applicable for the 2012/2013 year are set out below. We have included the tax rates for the 2012 year (including the low-income threshold for the Medicare levy announced in the May 2012 Federal budget) at the end of the article, for your reference and convenience.

Note: If you’re Age Pension age or older, you may be eligible for a higher tax-free threshold by taking advantage of the Senior Australians Tax Offset (SATO). Refer to other SuperGuide articles for more information on SATO.

Note: The primary source for taxpayers on any information relating to tax rates is the Australian Taxation Office website (www.ato.gov.au). SuperGuide doesn’t answer questions specifically on the income tax rates.

Income tax rates from 2012/2013 financial year

From the 2012/2013 year, the tax-free threshold jumps to the first $18,200 of your income. You will be able to earn up to $20,542 (from the 2012/2013 year) before any income tax is payable, when taking into account the Low Income Tax Offset (LITO). From the 2012/2013 year, your top tax rate can be expected to be 0%, 19%, 32.5%, 37% or 45% (plus Medicare levy).

Source: Adapted from the Office of the Deputy Prime Minister and Treasurer 2011, Joint media release with Prime Minister (No .081) 10 July 2011, ‘Combining tax cuts with significant tax reform’, *Includes the effect of the tax-free threshold and the low income tax offset (LITO)

For the 2011/2012 year, you can expect a tax-free threshold on the first $6000 of your income, and you can earn up to $16,000 (for the 2011/2012 year) without paying income tax when taking into account the Low Income Tax Offset (LITO). For the 2011/2012 year, your top marginal tax rate can be 0%, 15%, 30%, 37% or 45% (plus Medicare levy).

Source: Adapted from information on the ATO website (www.ato.gov.au). Maximum LITO payable is $1500 up to taxable income of $16,000.

Note: For the 2011/2012 year only, if your taxable income is more than $50,000 then your income will also be subject to a flood levy. The flood levy is set out in the table below.

Table source: ATO (www.ato.gov.au)

Note: In the May 2012 Federal Budget, the Government announced that, backdated to 1 July 2011, the Medicare Levy low-income threshold will increase in line with the Consumer Price Index to $19,404 for singles (up from $18,839) and increase to $32,743 (up from $31,789) for couples. For families, the additional amount of threshold for each dependent child or student will be increased to $3,007 (up from $2,919). For the 2011/2012 year, the Medicare Levy low-income threshold for pensioners below Age Pension age increases to $30,451 (up from $30,439).

In the May 2012 Federal Budget, the Government has announced that from 1 July 2012, anyone earning more than $300,000 will pay 30% tax on concessional contributions paid into a super fund, doubling the super tax bill for high-income earners. The current contributions tax is a flat rate of 15%.

Concessional contributions include Superannuation Guarantee (SG) contributions, salary sacrifice contributions and tax-deductible super contributions. If you’re a member of a defined benefit fund (funded or unfunded schemes), then ‘concessional contributions’ for the purpose of the super contributions surcharge will include all of your notional employer contributions.

Clearly, the latest batch of Labor ministers don’t have a political memory. The Liberal party introduced a similar tax in 1996, and it ended up costing all super fund members via a massive hike in administrative costs. The shocking debacle, when introduced by the Liberal party, cost the super industry and fund members as much money to administer the super surcharge, as the government collected in extra super taxes.

In effect, by repeating this political mistake, the government will be taxing the rich, and robbing the ‘poor’! I will explain how this super surcharge will hit all super fund members later in the article.

How will the super contributions surcharge work?

The big question is, how will the Federal Government measure a person’s income to determine if the person earns more than $300,000 a year? According to the Government, the definition of ‘income’ for the purpose of this measure will include:

• taxable income
• concessional superannuation contributions
• adjusted fringe benefits
• total net investment loss
• target foreign income
• tax-free government pensions and benefits
• BUT less child support.

Prior to the 2012 Federal Budget, there were rumours that tax-free private pension income would also be included in the definition of income for the purposes of this new superannuation contributions surcharge. Based on the latest information from the Government, tax-free private pension income is not included.

Note: According to the Federal Government, “if an individual’s income excluding their concessional contributions is less than the $300,000 threshold, but the inclusion of their concessional contributions pushes them over the threshold, the reduced tax concession will only apply to the part of the contributions that are in excess of the threshold.” The Government provides an example of how this adjustment would work for a taxpayer who finds themself in this position: If a person has income of $285,000 but also has concessional contributions of $20,000, this takes total income to $305,000. The super contributions surcharge of 30% would only apply to $5,000 of the person’s super contributions.

Other key facts about the new super contributions surcharge include:

• Ironically, the Federal Government ministers realise the insanity of combining the current excess contributions tax scheme with a super surcharge by promising that the super surcharge will not apply to concessional contributions which exceed the concessional contributions cap (and are subject to the excess contributions tax). The Government had to publicly state this exception because we could have had the situation where compulsory superannuation contributions were taxed at 108% – not a good look!
• The 15% superannuation contributions surcharge (taking the contributions tax rate to 30% for high-income earners) does not affect the 15% earnings tax on super fund earnings, or the tax exemption on fund assets financing retirement pensions.

Everyone ends up paying the super surcharge

Despite the media spin, those on $300,000-plus salaries are not the only ones who will be hit by the super surcharge. Other taxpayers who will be hit with the 30% tax on super contributions include:

• low-income earning and middle-income earning individuals retiring (in the financial year they retire)
• investors selling assets such as properties or shares (in the year they sell)
• other individuals who receive lumpy income (such as women who have re-entered the workforce and trying to catch up on earnings after time out of the workforce, and small business people)
• administrative nightmare for all super funds trying to introduce software systems to track and collect the extra tax for a minority of members. The super funds will pass on these costs to all super fund members.

The tax impact for those affected is set out in the table below.

Note: The Department of Treasury intends to consult with the superannuation industry on further design and implementation details. We will update this article when further information becomes available.

A. Fund members/trustees can purchase assets owned by the SMSF (although the SMSF cannot purchase assets from members, except in limited circumstances).

According to the super rules, investments by SMSFs must be made and maintained on a strict commercial basis. A fund trustee must ensure the asset valuation is robust, and the purchase or sale price of SMSF assets must reflect true market value.

The ATO states that you must obtain an independent valuation report to determine market value before a SMSF member purchases the asset from the super fund. You must ensure there is a written contract in place and that the terms of the contract are on commercial basis.

Note. If the SMSF makes a profit on the sale of an asset then the fund will have to pay capital gains tax (CGT).

My response is of a general nature and should not be relied upon when looking at a specific set of circumstances. I suggest you chat to an accountant/adviser about the compliance and financial implications of such a strategy.

The tool, called the ‘Self Managed Superannuation Fund Trustee Education Program’, was launched in late-March 2010, and developed by three Australian accounting bodies – CPA Australia, Institute of Chartered Accountants in Australia (ICAA) and National Institute of Accountants (NIA).

Seven topics plus a quiz

The online SMSF Trustee Education Program takes about one hour, maybe two hours, if you’re a newish SMSF trustee. Within the program, you go through the introduction and seven topics:

1. Understanding your role as trustee
2. Your responsibilities
3. Your decisions
4. Investment restrictions
5. Accepting contributions
6. Paying benefits
7. Your administration

At the end of each topic you are asked to answer two or three ‘knowledge check’ questions. You’re not assessed on these responses; they are merely prompts to help you remember the information.

Earn a certificate with a score of 70% or more

After you complete the last topic (‘Your administration’), you are then asked to sit a 20-question multiple choice quiz. If you get 14 or more of these questions correct, you can generate a certificate as evidence that you have completed the program.

In April 2010, I completed the program and sat the quiz three times (many of the questions vary each time so have a go at the quiz more than once if you wish). I believe the program provides an excellent refresher of the super rules for existing SMSF trustees, and an effective trigger to find out more information for individuals aspiring to become SMSF trustees. I sat the quiz again two years later, in April 2012 (I disclose my scores later in the article).

Purpose of SMSF Trustee Education Program

The program’s website (www.smsftrustee.com) states that the aim of the program is to educate SMSF trustees throughout Australia. The program has been designed around the SMSF trustee declaration (for background on this declaration, see SuperGuide’s article SMSF trustee declaration: a quick guide).

Note: The program is for educational purposes, and cannot be considered as financial advice.

According to the original media release announcing the launch of the online tool: “upon completion of the program, SMSF trustees should be equipped to confidently sign the SMSF trustee declaration form, knowing they have satisfied all the competencies expected of them.”

The website promises that after completing the program, SMSF trustees will be able to understand:

• the roles and responsibilities of a SMSF trustee
• the investment restrictions imposed on an SMSF trustee
• contribution rules
• benefit payment rules
• SMSF administration.

The program is a great tool, but the claims made that program participants will be able to understand all of the areas listed above is slightly ambitious. I do believe however that you will certainly be able to better understand the superannuation rules applying to SMSFs, and I encourage all SMSF trustees to give the tool a go. You can register to access the tool by visiting www.smsftrustee.com.

For more detail on DIY super (SMSFs) and the topics listed above you can check out the ‘DIY super’ section of our website (www.superguide.com.au), or the superannuation section of the ATO website (www.ato.gov.au), or you can read my latest book DIY Super For Dummies, 2^nd edition (Wiley, $29.95).

Trish Power’s quiz results:

April 2010 – sat the quiz three times

1. 100%
2. 95% (one incorrect question – misread the question – excuses, excuses!)
3. 100%

April 2012 – sat the quiz once

1. 100%

A: Before I answer your question, I need to clarify your comment about now being able to use a super fund to purchase real estate. Superannuation funds, including self-managed super funds (SMSF), have always been able to invest in direct property. The big change is that the Government now permits SMSFs to use a special type of structure to invest in property which means in certain circumstances, a SMSF doesn’t need the full purchase price to invest in real estate, or to invest in any other allowable investment.

A SMSF can in invest in all types of property such as indirect property investments, direct property (residential, commercial, industrial and rural) and property located overseas.

Anyone considering such an investment should seek out professional advice and if a SMSF is considering a particularly complex strategy, then perhaps a call to the technical experts at the ATO may be in order.

In theory there are no special rules applicable to direct overseas property but a few issues come to mind, including the following:

• Documentary evidence that a SMSF owns the overseas property, and that the fund ownership is recognised in the country where the asset is located.
• Any investment must still be consistent with the sole purpose test, which means, for example, a residential property located in the United States could not be leased to a fund member or relative of a fund member.
• Any investment needs to be considered against the potential risk and return of the investment, and the cash flow needs of the fund. For example, a viable return for such an investment would also need to take into account the exchange rate between the Australian and US dollar, the cost of any flights to inspect the property, and consider the risk that such overseas trips may be more closely investigated by the ATO as a possible breach of the sole purpose test.
• A fund’s auditor may need special documentation to verify the existence and ownership of the asset

You also ask for some information on the process to purchase overseas property and the entities necessary to proceed with such an investment. Our website cannot provide you with a list of overseas property specialists that are located in Australia, or located overseas. As a preliminary step, I suggest you speak with a financial adviser or accountant who knows a lot about SMSFs to confirm that your fund is in a position to consider such an investment, and to review the compliance process involved from a SMSF point of view.

A: Before I respond, please note that anyone considering the tax implications of a strategy or investment decision should speak to a registered tax agent, typically an accountant.

In relation to superannuation and capital gains tax (CGT), the tax payable depends on whether the super account is in pension phase, or in accumulation phase (that is, not paying an income stream/pension).

Accumulation phase

While a super account is in accumulation phase, any earnings on the assets representing that super account are subject to 15% earnings tax.

Any capital gains that your superannuation fund makes from the sale of fund assets are subject to earnings tax. The tax implications when selling a SMSF asset, such as a property investment, will depend on the length of time a SMSF owns the asset before sale.

Note: During accumulation phase, if an asset is sold within 12 months of purchase, then any capital gains is subject to 15% earnings tax. If the asset sold has been held for more than 12 months by the fund, then the fund can take advantage of the CGT discount. The CGT discount means the SMSF only pays 15% earnings tax on two-thirds of the capital gain. In effect, a tax rate of 10%.

Pension phase

If an individual is drawing a pension from a SMSF account, then no tax is payable on any earnings from assets financing the pension (also known as an income stream). In short, your super fund does not pay tax on investment income, including capital gains, from assets that finance an income stream.

Note: You need to be mindful that capital gains tax may be payable upon the sale of fund assets after your death, if you have arranged for any death benefits to be paid as a lump sum. In addition, if you’re leaving your super benefits to your adult children or other ‘non-dependants’ you must pay death benefits as a lump sum.

The following articles also explain how the tax rules apply to earnings on superannuation assets:

• 4 must knows about super’s tax rules
• Super tax- as easy as 1-2-3
• CGT calculations for SMSFs

Financial regulator, the Australian Securities and Investments Commission (ASIC), conducted a shadow shopping study of financial advice during 2011 and found that over a third (39%) of financial plans surveyed were poor, only 3% were considered good, while the majority of advice examples (58%) were considered merely adequate. I explain these findings later in the article.

Although the sample of plans (64) and advising firms (36) was relatively small, the findings are truly shocking and an indictment on the broader financial advising industry. In any industry you can generally find some participants who are not properly qualified or not properly trained, but it is most frightening that very little of the financial advice in the shadow shopping survey was found to cater for the clients’ personal circumstances.

And please, any adviser planning to send me an indignant email about publishing the findings from this study, note that I don’t make up this stuff. The study was conducted by the organisation that regulates you – ASIC, and the dud advisers make all advisers look bad which is serious food for thought for the advising industry, and for your clients. For those advisers who refuse to admit reality, you can pretend there are no bad advisers and the industry structure is free of conflicts, and we can continue to expect these damning reports every couple of years, further ruining the reputation of the financial advising industry.

We need the financial advising industry to show leadership and reward and promote the good advisers rather than spend all of their lobbying money on protecting the duds of the industry and harking for the old product-focused business model.

Background to the ASIC study

Before I outline the more detailed findings from the study, it’s worth explaining how the survey was conducted.  The study was designed to “investigate the quality of advice being provided to people to help them plan and prepare for retirement at or around the time they are retiring. [The] aim was to enable [ASIC] to understand and illustrate, using real examples, what constitutes good and poor quality advice”.

According to the study report, Report 279 Shadow shopping study of financial advice (REP 279), participants in this study were real consumers of financial advice. ASIC engaged a fieldwork agency, Colmar Brunton Social Research, to recruit people aged 50 to 69 years who were intending to seek retirement advice or who had sought this advice in the past 15 months. Participants chose to seek financial advice, and they searched for, and selected, their own adviser and bore the cost of any advice they received. Participants were not directed by ASIC to meet with any particular advisers or to seek advice on particular topics. The sample included people who received financial advice for the first time, as well as people who had received financial advice before.

Participants also provided ASIC with information about their personal circumstances (their objectives, financial situation and needs) and copies of the advice they had received. ASIC reviewed the participants’ impressions of the adviser and impressions of the advice process.

The 12-person expert panel was made up of industry representatives, namely, 12 nominees from “advice groups and superannuation funds nominated by the Financial Planning Association, Association of Financial Advisers, and Association of Superannuation Funds of Australia. The reference group also had a nominee from the Financial Ombudsman Service and a nominee from ASIC‘s Consumer Advisory Panel.”

What are poor, adequate or good financial plans?

The ASIC report outlines what it considers to be poor, adequate and good financial advice. 

Poor advice

The study revealed that 39% of financial plans presented to the shadow shoppers were of poor quality. In other words, those plans did not comply with the law under section 945A of the Corporations Act; which means, the advice provided was inappropriate for the client, and the adviser did not have a reasonable basis for providing such advice. Although the study was not a surveillance exercise, ASIC has referred all cases of poor advice to ASIC‘s Misconduct and Breach Reporting team for further investigation and review.

ASIC Commissioner Peter Kell said: “Too much poor advice provided to our shadow shoppers was overly product focused and not strategic enough to help clients develop a realistic and achievable plan for their retirement and make the most of their financial resources taking into account their circumstances and attitudes to risk.”

Adequate advice

Although 58% of financial plans reviewed were adequate and complied with section 954, these plans fell short due to significant weaknesses in the recommended strategy or products.

According to ASIC, within the grade of ‘adequate’, quality of advice varied with some advice examples close to ‘good’ and moving along the spectrum towards ‘poor’ quality advice.

Good advice

According to the ASIC study, good quality financial advice improves a client‘s financial situation. It says that this is not necessarily confined to a monetary improvement, but “encompasses a person‘s preparedness for the future”. According to the ASIC report, good quality advice has some or all of the following features:

• a clearly defined scope and a thorough investigation of the client‘s relevant personal circumstances
• assistance given by the adviser to the client to set prioritised, specific and measurable goals and objectives
• where relevant, consideration of potential strategies
• where relevant, consideration of the wider impact of the advice—for example, tax or social security consequences
• good communication with the client. This includes Statements of Advice (SOAs) that are logically structured and easy to understand, and verbal interactions that aim to ensure that the advice and recommendations are understood.

Only 2 out of the 64 financial plans surveyed were considered ‘good’ plans. According to ASIC, advisers whose advice examples were rated as good by ASIC analysts had “a clearly defined scope, and assisted the client to form realistic and measureable objectives about their retirement and to implement strategies to try to achieve them. We saw evidence of multiple strategies being compared and evaluated, good budgeting and cash flow projections, and realistic discussions about what clients could fund in their retirement. Good written and personal communications ensured that the clients were aware of their options, while the SOAs were logical, well structured and easy to understand.”

You can find examples of poor, adequate and good advice and comparisons on pages 32 and 33 of the report. The link for the report is at the bottom of this article.

Common problems with financial plans

The following problems were common in the advice ASIC graded as ‘poor’ or ‘adequate’:

• Inaccurate or incomplete investigation of the client’s personal circumstances
• Recommended strategies don’t address the client’s needs or objectives (including focusing only on selling products)
• Exclusion of crucial client information, such as client debts
• Failing to provide justification for switching recommendations, in particular, not disclosing features from current products that the client would lose by switching
• Poor communication in the Statement of Advice (SOA)
• Nearly half of the advice statements did not consider how long the client’s money would last in retirement

Note: The majority of advisers involved in the ASIC study (69%) were affiliated with a top 50 licensee. Nearly half (45%) of the advising firms involved were bank-owned, 20% were owned by superannuation funds, 17% were independently owned and 17% owned by another financial services conglomerate.

Perceptions can fool the smartest client

The ASIC report also found that Australians have difficulty assessing the quality of the financial advice they receive. Apparently, participants in the study rated their advisers highly and rated the advice they received highly, even when they received poor advice. For example, 86% of participants felt they had received good quality advice (even though only 3% received such advice), and 81% said they trusted the advice they received from their adviser ‘a lot’.

From the in-depth interviews ASIC conducted with 11 participants, it found that often where participants had received ‘poor’ or ‘adequate advice’, they still reported feeling quite satisfied with the adviser and the advice experience. ASIC considers this unsurprising, given the complexity of retirement advice.

If any advisers are reading this article I suggest you access the full report here. The ASIC report is a very interesting read highlighting the challenges facing the financial advising industry in making the cultural and structural changes necessary to serve Australia’s retirement planning needs.