The time has come for our large superannuation funds to stop using clumsy dinosaur-like business practices that unfairly penalise their members and fail to recognise what the modern superannuant requires from their superannuation fund provider.
In recent times, several representatives of both industry and retail superannuation funds have come out with outlandish statements suggesting the reason for people moving away from the big funds in favour of the more popular SMSFs is because SMSFs enjoy the benefit of an unequal playing field.
Is it a question of an unequal playing field or is it a question about the way large superannuation funds conduct their business? It is certainly not to do with the laws that govern superannuation or the tax framework around superannuation as has been suggested.
In a recent article in The Australian Financial Review (28 September 2013), Michael Rice of Rice Warner Actuarial said large superannuation funds are at a disadvantage because they are required to charge a tax against a member’s account for unrealised capital gains. This practice undertaken by the large funds has nothing at all to do with the law.
With the exception of trading stock, for example, if you were a share trader, the Australian income tax law does not require any tax to be paid on unrealised capital gains. So why is it the large funds choose to charge their members for this tax when in fact they actually have no requirement to pay the tax?
To make it worse, in the same article, Rice highlighted that the tax deducted from a member’s account is placed into a reserve account. Of course, this now begs the question as to how the money held in reserve is used by the fund and whether or not the use of this money would pass the sole purpose test.
In an SMSF, tax is only deducted from a member’s account when it is payable so the member has the benefit of receiving an allocation of investment earnings for the entire time the fund holds the member’s before-tax dollars. In some industry and retail funds, earnings are allocated on an after-tax member’s balance because contributions tax is deducted as soon as the fund receives the contribution, even though the contributions tax is not payable until a later date.
There are also issues in some large funds around how imputation credits are actually applied back to members and in fact why these imputation credits are not used to offset the contribution tax charges raised by the fund against member accounts. Transparency is a real issue for the big funds.
Adding to this problem, large superannuation funds all seem to have different business practices with regard to managing member account balances, whereas all SMSFs are governed by the same rules and regulations. SMSFs are required to be audited at least annually by an Australian Securities and Investments Commission authorised auditor to determine that the SMSF is a complying superannuation fund.
The situation for the large funds is difficult because they have still not been able to come up with a way to offer the new generation of superannuation members what they want. In a sense, these funds seem to be in denial of this fact and tend to want to blame the superannuation playing field.
If the large funds want to stop their members leaving in droves to a more transparent SMSF environment, then they must start to find ways of running a more transparent business. The starting point for transparency should be to appoint truly independent members to their boards and to remember that one size does not fit all.
Simon Makeham is a director of the Australian SMSF Members Association.