Superannuation Changes – Alert Update June 27, 2013

This week there have been a number of long awaited changes to superannuation law that have passed the parliament. This Alert outlines some of the key changes that we should be focusing on and how this may impact your future retirement planning strategy.

 

Off market transfers

The Tax and Superannuation Laws Amendment (2013 Measures No. 1) Act 2013 was passed on 25 June with the significant amendment of the removal of Schedule 4 which contained the proposed changes in respect of acquisitions of assets by SMSFs from related parties and the disposals of assets by SMSFs to related parties.  Importantly, this means there are no additional restrictions or requirements to trade off market in respect of related party transactions with SMSFs.

Schedule 4 of the Bill was introduced as the outcome of the Government’s announcement to ban off market transfers to and from SMSFs where a market exists, following such a recommendation from the Cooper Review .  The bill was set to introduce new section 66A of the SIS  Act specific to SMSFs which proposed that SMSFs must not acquire an asset from a related party (subject to a number of exemptions) and that SMSFs must not dispose of an asset to a related party (subject to a number of exemptions).  The acquisitions exemptions provided for listed securities acquired in a way prescribed by the regulations, however no draft regulations had been released.  Business real property and in-house assets were also proposed exemptions, provided that they were acquired at market value as determined by a qualified independent valuer.  Similar exemptions were proposed in respect of disposals.

The proposed amendments contained a number of issues in respect of their interaction with Corporations law and existing wash sale rules.  Together with the lack of any accompanying regulations , it seemed unlikely that the necessary package of legislative changes could have been prepared and implemented by 30 June 2013.

Whilst the back down is welcome, it is a timely reminder that requirements already exist in respect of off market transfers.  The timing of valuation for the purpose of making off market contributions is the date transfer forms are ready to be lodged with the relevant registry.  There are also requirements for off market disposals of certain collectables to be conducted at a price no less than that determined by a qualified independent valuer.

The removal of the proposed changes means there will be no additional brokerage and valuation costs for SMSFs to trade with related parties. There will also be no potential barriers to closing SMSFs where disposal of frozen funds or unique assets would have caused valuation difficulties.

Higher concessional contribution cap

Tax and Superannuation Laws Amendment (Increased Concessional Contributions Cap and Other Measures) Act 2013 was passed on 24 June.  The measure increases the concessional contributions cap to $35,000 for individuals age 60 years and over for the 2013-14 financial year and to $35,000 for individuals aged 50 years and over for the 2014-15 financial year and later financial years.  The temporary cap will cease when the indexed general cap becomes $35,000.

Lower tax concessions for those earning over $300,000

Superannuation (Sustaining the Superannuation Contribution Concession) Imposition Act 2013 was also passed on 25 June.  The measure increases the tax paid on concessional contributions from 15 per cent to 30 per cent for individuals with income above $300,000. The amendments apply to contributions made on or after 1 July 2012.

An individual will pay this tax for an income year if their income for surcharge purposes (less reportable super contributions) plus their low tax contributions for a financial year exceed $300,000.  Special rules apply for defined benefit funds, where the value of contributions will be determined by an Actuary.  Judges who are members of a fund established under the Judges’ Pensions Act 1968 are exempt, as are some senior employee members of constitutionally protected funds.

Superannuation contributions to which the changes apply will be known as low tax contributions and include:
 – employer contributions to accumulation interests
 – personal contributions which are claimed as an income tax deduction
 – contributions for defined benefit interests (valued by an actuary)
 – salary packaged contributions to constitutionally protected funds

The Australian Taxation Office (ATO) will work out an individual’s low tax contributions based on the member contribution statements required to be lodged by super funds each year.  The ATO will also work out an individual’s income for surcharge purposes from their tax return.  It will then issue a notice of assessment. The tax is generally due and payable 21 days after the ATO gives the notice of assessment. The ATO will also provide a release authority so that the individual may request an amount from their super fund (other than a defined benefit fund) to make the payment to the ATO.

SMSF levy

Superannuation Legislation Amendment (Reform of Self-Managed Superannuation Funds Supervisory Levy Arrangements) Act 2013 was passed on 16 May 2013.

The measure increases the maximum amount of the annual levy from $200 to $300 from the 2013/14 financial year.  The actual levy amount for a specific income year is prescribed in the relevant regulations and is $191 for the 2012/13 year and the government has announced an increase to $259 for the 2013/14 year.  The Act also changes the timing of collection of the levy.  Previously the levy was payable upon lodgement of the fund’s annual return whereas now the levy will be due and payable on the day specified in the regulations.

The changes are intended to ensure that the levy is collected from SMSFs in a more timely way (consistent with the collection of levies for APRA regulated funds) and that the ATO’s costs of regulating the sector are fully recovered.

Member benefit protection

On 16 May 2013, the Superannuation Industry (Supervision) Amendment Regulation 2013 (No. 2) was made to repeal the member benefit protection rules with effect from 1 July 2013.  The member benefit protection rules were such that members with balances under $1,000 could not ordinarily be charged more in administration fees than the investment returns earned on their account.

The repeal of the member benefit protect rules were necessary in order to resolve the conflict between the requirement to protect the benefits of certain members and the MySuper prohibition on charging differential fees to members.

As you can see it has been a busy time in Canberra …. So much for simple super 

Happy Days 

Luke Eres CFP SSA 

 

 

Why Germany will preserve the euro – An Educated View June 19, 2012

I came across this article written by Michael Collins, Investment Commentator at Fidelity and I thought that it would be good to share this with our followers.

I thank Michael’s for his contribution:

Germany’s abhorrence of inflation is easy to explain. The Weimar Republic (1919 to 1933) hosted hyperinflation between 1921 and 1923 when authorities printed money to overcome the disruption caused by political instability and war reparations. Savings evaporated as prices rose 130 times over in 1922 before the papiermark became valueless in 1923.

Inflation wrecked savings again around the end of World War II. While inflation’s scourge was first suppressed by rationing and price controls, its devastation was wrought when the Reichsmark was exchanged for the Deutsche mark at a rate of 10 to one in 1948. Over the past decade, inflation fears were revived when, after joining the euro at too high a rate in 1999, Germany undertook austerity-like reforms to become more competitive and wages and public benefits stagnated. As these inflation fears were stirring in today’s Germans (even though inflation only peaked at 3% in 2007), they were footing the cost of reunification. Deutsche Bank calculates that by the middle of this decade the merging of West and East Germany since 1990 will have cost the equivalent of Germany’s annual GDP

This history explains Berlin’s stances during the eurozone crisis against inflation and its reluctance to salvage another economy, even if past rescues have, in effect, bailed out German banks while shifting risks to eurozone taxpayers.

Citing the moral hazard of saving cheating Greece and other troubled eurozone members, the centre-right government of Chancellor Angela Merkel has pushed the self-defeating policy of austerity over the past two years. She is undeterred, even though this policy has caused record eurozone unemployment (11%), heavier government debt burdens and steeper economic slumps. Her tough approach led to the eurozone fiscal compact that makes Keynesian stimulus illegal.

Germany’s other stances during the crisis are more about what it opposes. Berlin is resisting financial-stability powers for the European Central Bank, such as an ability to meet bond payments. It is against more cheap liquidity from the ECB, which gave banks one trillion euros (A$1.3 trillion) via three-year repos around New Year. Berlin rejects eurobonds or similar collective efforts to underwrite eurozone sovereign debt, which would boost yields for German businesses and mean that Germany would help foot the bill for any default. It has baulked at a banking union, which would involve a recapitalisation fund and deposit guarantees. It cringes at higher inflation in Germany of, say, 4% to 6% that would help erode the real debt burdens of its neighbours.

Oh that upheaval!

What’s Berlin in favour of apart from budget discipline? It calls for “future-oriented” investment such as infrastructure spending, supply-side reforms such as flexible labour markets, greater business access to capital, privatisation programs and freer intra-Europe trade. Merkel is in favour of “more Europe” with moves “step by step” towards a fiscal and political union of eurozone countries.3 And Berlin is prepared to do “everything necessary” to keep Greece in the euro.4
The contradiction within this last intention is that it implies a joint approach to tackling Europe’s woes while Germany’s stance is shattering such unity. The other inconsistency about Germany’s position is that its policymakers have failed to learn fully from their own history; namely, how policies similar to theirs today crushed Germany in the 1930s.

In 1930, Heinrich Brüning began his two-year rule as chancellor of a centre-right coalition, at a time when Germany’s shrivelling economy was battling capital flight and war reparations. Brüning’s strategy for a shrinking economy, rising unemployment and deflation of 7% was to balance a budget in structural deficit. He slashed official salaries by up to 20% and raised income taxes, among other steps, and when revenue fell he lopped spending even more.5
The result was the German’s economy collapsed. Industrial production plunged 40% by 1932 from four years earlier, unemployment soared to about one-third of the workforce and Brüning won the nickname “the hunger chancellor” to encapsulate the misery in society.6The political centre evaporated – as it has in Greece now – and the rise of far-right and far-left parties heralded the end of the Weimar Republic and the ascension to power of Adolf Hitler in 1933.

What could prompt Germany to learn fully from its history and ditch its austerity push and take grand steps to solve the eurozone crisis? Lots of things, of course, including pressure from other governments concerned about the social costs of austerity to political calculations by Berlin at what the collapse of Greece will mean for Europe. And there’s the cost that Target-2 will inflict on Germany.

Involuntary lending

Target-2 is the loose acronym for the Trans-European Automated Real-time Gross Settlement Express Transfer system. In plainer speak, it stands for the eurozone’s interbank system – how a commercial bank in one eurozone country pays a bank from another. The “2” is because the system was expanded in 2007 to capture small transactions that until then were cleared through private systems.

The issues with Target-2 arise because a country’s balance of payments must, well, balance. This means that the current and capital accounts must add up to zero. (These accounts are the widest measures of a country’s trade and capital flows.) Countries with current-account deficits must attract capital to offset this gap, and vice versa. There were no Target issues before the US sub-prime crisis erupted in 2007 because private capital flowed from Germany to southern Europe as Germany enjoyed current-account surpluses while its neighbours had current-account deficits.

But since 2007 private capital no longer funds the current-account deficits of southern Europe – in fact, private capital has gushed back to Germany. It has unwittingly fallen on national central banks within the eurozone to ensure balances of payments balance. They are doing this via pseudo euro transfers, which are a routine part of central banking. In the absence of private capital flows, these transfers create liabilities to the Eurosystem for current-account debtors and claims for those running current-account surpluses – namely Germany.7 The Eurosystem comprises the ECB plus national central banks in the eurozone.

In essence, when, say, Spain or Greece import goods from Germany, national central banks manipulate the money supply in their jurisdictions to facilitate the payment and adjust their balance sheets to show a liability for the importing country and a claim for Germany. As well as showing up on national central-bank balance sheets, the Target transactions appear on countries’ balances of payments. But nothing shows up on the ECB’s books because these payments net out to nothing for the whole system. That’s why they went unnoticed for so long after 2007.

Trapped

Thanks to Germany’s export prowess, the Bundesbank’s claims on the Eurosystem have exploded from five billion euros in 2006 to well in excess of 850 billion euros now, more than 30% of Germany’s GDP. They could easily, according to some forecasts, exceed one trillion euros by year end. Interestingly, bank runs in Greece, Spain and other troubled economies that sent money to Germany boost Germany’s Target claims in a similar way to that of its exports. The Netherlands has some Target claims, too, while Greece, Ireland, Italy, Portugal and Spain have sizeable Target liabilities.

Hans-Werner Sinn, the president of Munich’s Ifo Institute think tank who first warned about the Target menace, claims that since 2008 these transfers have financed the current-account deficits of Portugal and Greece, a quarter of Spain’s gap and all of Ireland’s shortfall plus its capital flight.8 Sinn is among the most important players in the eurozone debt crisis you’ve never heard of as he first used the Target issue to push austerity and block eurobonds.

The functioning of the Eurosystem depends on each country meeting its obligations and is underpinned by the collateral held by central banks. But there is no system whereby national central banks hand over tangible assets to redeem debts as occurs between the 12 regional Federal Reserve Banks in the US over similar liabilities. The lack of such a system led to the collapse of the Bretton Woods fixed-exchange-rate system that governed international finance from 1944 to 1971 though creditor nations could redeem claims for gold. Even if the Eurosystem brought in such a system, central banks from struggling eurozone countries lack the marketable assets to give the Bundesbank anyway. So Germany is poised to pile up no end of these intangible credits.

The crunch for Germany is what happens to these claims in case of default. If a eurozone government goes bust, the ECB would have to write off a defaulting country’s Target liabilities and the cost would be shared among the eurozone’s central banks in proportion to their ownership of capital in the ECB. For Germany, that’s 28%, though this share would marginally increase as the defaulting country’s central bank wouldn’t pay. Thus a Greek default could be managed. But a collapse of the euro would wipe out Germany’s claims because there are no laws determining how they would be paid if the eurozone splintered. “This may be the largest threat keeping Germany within the eurozone and prompting it to accept generous rescue operations,” Sinn said in a co-authored paper.

What he’s saying is that Germany stands to lose so much from foregone Target claims alone if the eurozone shatters that it might as well spend the money needed to save the euro. On top of the wealth that would vanish with lost Target claims, the money Berlin has given to the European Financial Stability Fund and placed in IMF rescue packages would be at risk. Then add on the political and financial costs of an economic seizure if the euro were to collapse. The only downside to Germany’s conundrum is that if the eurozone is to crack up, the sooner the better for Germany because those Target claims climb every day. While events may overtake authorities, it’s easier to believe that German policymakers will act to keep the euro in its most extended form as possible rather than opt to put their country and the rest of Europe through Weimar Republic-like economic torment.

Greek election results positive, but Eurozone uncertainty remains June 19, 2012

Good Morning All,

We trust that today’s posting finds you well.

The result of Greece’s 17 June election were a win for pro-austerity, but only just.

Coalition of New Democracy and PASOK the most likely outcome

The Greek election results in the second vote for the year put the conservative pro-bailout New Democracy party as the winners with 29.7% of the vote and 129 seats compared with the far left Syriza’s 26.9% (71 seats). By leading the count, New Democracy has picked up a bonus 50 seats. The results show a swing to New Democracy and Syriza (both of which increased their vote by over 10%) at the expense of the smaller parties, emphasising the increasing polarisation of the population.
If New Democracy can form a coalition with pro-bailout PASOK (socialists) which gained 12.3% of the vote, then they will be able to form a majority government with 162 out of a total 300 seats. If the Democratic Left also joins the coalition, that will bring the number of seats to 179. Without PASOK, a governing coalition would be hard to form since most of the other parties oppose the austerity package. The communists (12 seats) and far right Golden Dawn (18 seats) seem too extreme for the major parties and the other party, the Independent Greeks, appears too idiosyncratic to be a stable coalition member.

It is not a foregone conclusion that PASOK will agree to a coalition – in the past they have stated that Syriza must be part of the coalition – but the pressure will be intense and PASOK, which used to be the main party of the left, will be mindful that a third election might even further erode its vote to the benefit of Syriza. It may be possible to cobble a coalition together without PASOK but it would probably be an unstable grouping.
The most likely outcome seems to be a pro-bailout government. However, even in this case, the task of imposing a severe austerity programme and turning the economy around will remain challenging. There will be ongoing pressure to negotiate a new agreement. With Francois Hollandes’ election as French prime minister and the victory of his socialist party in the French parliament, the prospects for an easing of the austerity pressure from the European Central Bank (ECB) has increased. Nevertheless, Germany’s hard-line stance will limit the extent of flexibility, as will a general mistrust by other European states in Greece’s ability to deliver on its promises.

Immediate risk may have passed but Eurozone uncertainty remains

A coalition will remove the risk of an immediate Greek exit from the Euro given that Greece will continue to work with the European Union (EU) as opposed to Syriza’s commitment to abandon the agreements made at the end of 2011. The removal of the immediate threat of a Greek exit is a positive if only in that it gives the EU time to prepare for an exit if it becomes necessary – just as they prepared for the Greek default last year.
However, even if the Greek concerns have calmed slightly, the situation in Europe is still pressured by uncertainty about Spain and Italy. Moreover, if the pressure on Greece is relaxed too much, a concern will arise that other member nations will seek similar alleviation of austerity. The contagion risk therefore remains high.

RetireCare’s views are as follows:

The Greek election results are positive but not unambiguously so:

• Greece will not exit the Euro, at least in the short term.
• The cost of collapsing the Euro is such that at this stage we see it as a very unlikely scenario.
• There is no quick fix and Europe will remain challenged, so we would treat any optimistic market reaction with caution.
• Europe has demonstrated a willingness to act decisively over the past 6 months, with its long term refinancing operation and Spanish Bank recapitalization plan. As such, expectations of a collapse of the Euro and its member states are probably unfounded as are expectations of a quick fix.
• Volatility remains the most likely outcome for quite some time

Bidding you all a wonderful day ahead.

With thanks

Luke Eres CFP SSA

The Federal Budget …. An act of stupidity of the highest order May 14, 2012

Howdy All,

I trust that today’s post finds you well.

Attached is a budget summary as prepared by our office. Unfortunately what we witnessed last Tuesday was a desperate attempt by a bad Government to buy votes. So much for governing with a vision.

RetireCare – Federal Budget Summary

Bidding you all a great day ahead

With thanks

Luke Eres CFP SSA

Cost of living pressures …… are we delusional May 3, 2012

Today I post an article written by Bernard Keane who is a regular contributor on the Crickey Website.

Whilst I can’t say that I totally agree that costs pressures are not real he does raise some valid points and yes it would be great to finally have an honest politician speak the truth.

Given the train wreck we have at both ends of the political spectrum, I won’t hold my breath, enjoy.

While some in the media insist on pandering to Australians’ vast first world problems conviction that the cost of living is relentlessly rising, it was good to see the new report from the National Centre for Social and Economic Modelling yesterday about disposable income receiving significant coverage.

The NATSEM report showed that Australians’ incomes have significantly outstripped prices since 1984, with disposable incomes rising on average 20% ahead of inflation over the period. The report also showed that the gains were spread across all incomes groups, although the highest income groups had benefited more in the last decade compared to earlier.

It confirmed earlier evidence that, far from facing massive cost of living pressures, Australians have done very well from our extended period of economic growth — the Herald-Sun (commendably for a tabloid) last year found average households were $23 a day better off than five years ago.

If even the tabloid media are prepared to look seriously at exactly how much substance there is to claims about “cost of living” pressures, how about politicians?
On that front, there was a revealing moment last week after the ABS revealed a remarkably low CPI figure, so low it had some pundits suggesting the economy was tanking. Joe Hockey immediately produced a press release claiming the data showed essential household items were outstripping average incomes. Not to be outdone, Wayne Swan declared that the government knew that families were still doing it tough.

Actually, no, the evidence is they’re not doing it tough at all. Strong growth in incomes for the last thirty years and even through a financial and economic crisis is not “doing it tough”. The only households that are doing it tough are those in the bottom quintile of incomes, who spend a much bigger proportion of their income on necessities than the rest of us. But even they have enjoyed nearly 20% growth in real income over the last 30 years.

If you’re not in that income group and you think you’re “doing it tough”, it’s because you don’t know how to live within your means, not because politicians have failed you, or the economy is difficult. Even when it comes to identified issues like electricity prices, they are only playing catch up to the real levels they were at in the early 1980s. And in any event, the evidence shows that if you want lower electricity prices, you should privatise your generators. But voters dislike privatisation, as Anna Bligh can tell you.

No politician is willing to tell the truth, to make the obvious point that Australians are richer than ever before and should be grateful that economic reform paved the way for such a big rise in incomes, rather than whingeing about not being able to afford the wealthy lifestyles they want. Such a politician would be instantly declared “out of touch”. The last politician who tried that was John Howard, not long before he lost his own seat. His example has been heeded by everyone he left behind in parliament.

But here’s where it gets more interesting. Australia has entered a period of low inflation. We’re now saving more than ever before. We’re spending more on services, meaning retailers have to endlessly discount products. We’re shopping online and buying clothing, footwear and books, in fact all sorts of products, offshore, often for half the price we can get them here — a competitive shock that is making its way through supply chains across the country. The Australian dollar is putting downward pressure on everything from fuel prices to household goods. Electronic manufacturers are in a deflationary spiral due to overcapacity.
Traditional retailers are tearing their hair out. Even housing affordability is improving.

Politicians are continuing to live in the pre-GFC world of high demand, high income growth and high interest rates, where they fell over themselves to pander to voters’ delusion that they were under the hammer financially. But occasionally a pollie lets the mask slip a bit and we realise they know perfectly well what’s going on — like when Joe Hockey commendably challenged the “age of entitlement”. They must know what’s going on, because they can see the evidence in the lower tax revenue growth the government keeps having to deal with — David Uren of The Australian asked a good question of Wayne Swan last week when he wanted to know how much the low inflation result would curb revenue growth (Swan deflected the question to Budget Night).

The world has changed. The politicians know it, even if they won’t admit it. Even sections of the media know it. At some point a brave politician has to come forward and tell voters the truth.

Bidding you all a wonderful day

Luke Eres CFP SSA