ART Australian Retirement Trust changes

This is their new DIY structure:
Shares – listed assets

• Australian Shares Index
• International Shares Hedged Index
• International Shares Unhedged Index
• Listed Property Index

Unlisted assets

• Unlisted Assets

Cash and Bonds

• Bonds Index
• Cash

Losses
Emerging markets index
Changes
Property is now global
Added
Unlisted Assets- seems like an opaques bucket, which was exactly why I changed before.

I will do some digging and report back. Not sure that I shouldn't just go for a low cost premixed option to avoid pooled tax.

 

Sorry, are you suggesting either the DIY or one of ART's pre-selected options (e.g. balanced/growth) enables you to 'avoid pooled tax'?

My understanding was either option has you being part of pooled tax.

 

No they are still pooled but DIY allocations

 

the international indexed follows this index which includes emerging markets

Benchmark: MSCI ACWI ex Australia Investible Market Index (IMI)

 

Yes, you're right, they are both pooled. I was responding to this comment by @dunno many moons ago regarding the best approach for a pooled fund:

My final thought when last looking into pooled super funds, was if you were going to go with them then go with their masthead active high growth multi-asset option, they can do this better and cheaper than an individual can.

 

This is probably the most misunderstood element of fund reporting and accounting. ALL funds do it. Its APRA compliance stuff and a normal element of all funds except a SMSF.

Fund unitise the value of each investment.
Geneally to avoid day to day revals all units are revalued on a Wednesday for uniformity. Tax plays NO PART.

So lets say Fred chooses all growth. He may be issued 1,000,000 units at $1. If he changes strategy within a year he is charged tax based on 15% x the INCREASE in value or he get a tax benefit of 15% x ANY LOSS. If Fred sold after a year tax would be 10% of any gain or -15% on losses. Generally the only units not subject to tax provisioning is cash. Its always calculated proportionate to the units sold and their initial cost. Members can have a "tax benefit" if the aggregate of the tax is negative. It wont show anywhere. If Fred was in a pension account tax is ignored.

Why do ALL FUNDS do this?? SIS Regulations require that member benefits must be reasoably allocated across all members and at all times. earnings is both before and aftre tax and also with allowance for tax credits like franking etc. A tax benefit on earnings can be applied UP TO the tax on contributions that are taxed too

Tax is progressively provisioned against every member and then aggregated over a full year. There is no loss or benefit from tax adjusted unit pricing. It progressively ensures no member is advantaged or disadvantaged. Each member will pay their fair share of tax. I am unaware of any funds that individually accounts for tax as it is too complex. Instead it aggregates invisibly but is visible in the software. As a fund auditor I have had to check the calculations. Its messy. Its bizarre but aftre millions of transactiosn in and out the gain and loss etc is often out by as little as $25-$50 across 1.5million member accounts. Rounded to 6 decimal pts to avoid rounding variance.

NO fund will just share out tax based on members balances or a weighted daily average. A share of some COSTS may be apportioned that way prior to final tax calcs.

Approved software is also validated on a regular basis to ensure it remains consistent and compliant. APRA and fund auditors both do this.

 

Member direct options in industry and a few retail funds also avoid this issue. Wraps are another alternative.

 

No it doesnt. It is EXACTLY the same unless the direct option is a mere investment account for a smsf. Then all tax occurs at the fund. eg Commsec buy and sells are just that. Wraps in super for a smsf duplicate costs with the platform and fund. Wraps in super dont consider tax if its an investment wrap. If its a super wrap all tax is provisioned. Superwraps do this as the trustee IS the taxpayer.

Same with contributions...Tax will be withheld immediately from a member account if a deduction notice is made except if its a smsf. A SMSF will remit when tax is lodged. No fund trusts a member to leave sufficient cash in the fund to pay the tax on the fund due date.

 

How so, If I own VGS in a direct super option or a super wrap I only get taxed on the distributions. As I understand it, holdings are not unitized and nothing is provisioned for unrealized capital gains

 

If your FUND owns direct shares and ETFs in your account the unitisation is in the qty held. The fund tracks YOUR annualised tax. If you decide to close the account they will charge the actual tax to the account. Otherwise usually at years end and even then the fund accounting for it is often poor and its just a single amount. It is tracked but members dont see it. Each fund varies in when its visible. Some do it twice a year. Its also a bit like tax on contrbutions. Fund deducts it then and there but doesnt really pay the ATO until well after year end. Imagine if they didnt Untaxed gains and income...No franking credits etc ? APRA would cancel their AFSL if they didnt. The year end tax return for a fund combinies each members data into a summary so its member detail up to the fund level. All managed by sophisticated fund software APRA has approved. Hard to get it approved too. I had to get audit validation for new software a fund trialled and then it had to run parallel to the old software as well for 3 mths with all variances investigated. We gave a clean report and then APRA rechecked it.

Just demonstrates how few people understand how the inner working of any fund works. The exception is where the account is NOT a trustee super account but a investment wrap etc. In that case the FUND (eg smsf) accounts for tax not the investment custodian

 

How much exposure should you have to unlisted funds?

 

That doesn't sound right and would mean there is no tax benefit in holding direct rather than pooled assets.

Why wouldn't the fund defer withholding tax for unrealised gains of direct holdings until the member actually sells or closes their account?

 

You dont get it. Its a fund internal thing. Imagine if you sold lots of securities for a gain. And on 20 June you rollover. No tax ?
same occurs with franking. It doenst physically credit member accounts until the annual wash up. OR when account is closed if thats earlier. But its tracked in the background. Its also fair...That way if earnings tax is less than franking you still get a net credit. Even applied to contributions tax.

There is no tax deferral benefit excepting a smsf where it pays tax in the long run. It delays. Any other fund considers it but only accounts at 30 June usually. But it is still done on a week to week basin the way units are priced. They are tax adjusted. We also see this with some wraps. They dont report ASX trade prices as market value. They report an adjusted trade to reflect accrued ETF income for example. Avoids the need to accrue the expected member income on a indvidual basis.

Tax is considered a elemnet of earnings (except direct tax eg contributions)
SIS Reg 5.02A subject to other issues too such and low balance, mysuper etc. Its benefit protection standards.

Members who close out early can miss out of some shared benefits eg Often a allowance for fund costs is made and passed on based on estimates. And then adjusted to final at year end. Even use of smoothing reserves etc. Each fund methodology differs a little but overall its supposed to be immaterial. I had one where APRA went bananas. We found it in audit and went to board. They approached APRA. Round table to resolve how to fix it and be fair. A larger than expected reserve had accumulated and APRA wanted it shared based on the past 4 years not just one year. Nightmare. We even had to allow for deceased and rollover members. Its was akin to 2% pa each year for 4 years. Caused by two different actuarial experts.

 

I’m not referring to a tax deferral on concessional contributions and dividends. I understand they are taxed immediately in APRA funds vs at tax return time in SMSF.

The issue is whether unrealized capital gains provisioning is avoided with direct holdings in an APRA fund

 

If you are invested in any pooled superannuation fund (industry fund, retail fund, master trust etc.) the unit price could have a pre-tax unit price which includes an estimate for unrealised capital gains etc.

Each fund option should have a tax position as part of the unit pricing policy which should all feed into the overall tax position of the entire fund. What you would be referring to in your tax drag is that you might be invested in an International Shares option and within that option the trustee might buy and sell securities because of needing to rebalance with fund flows etc.

This would impact the investment option unit price with some level of "tax drag" that an individual may not be subject to if they were invested directly in an ETF for example - but the ETF has the same issue as a trust structure right? Rebalances cause realised CGT and create a "tax drag".

I'm not entirely sure how it works with some of the industry fund DIY options that allow you to purchase direct underlying securities but I would have thought it would be similar to a wrap account. Just would want to make sure you aren't forced to sell your securities to move to a retirement phase pension (from memory there were funds that you couldn't transfer your DIY option investments to a pension but not 100% on that).

These issues are why a lot of funds are now paying a retirement bonus to members that transfer to retirement phase pensions.

Does your super fund pay a retirement bonus when you start a pension? (superguide.com.au)

 

I’m not convinced these are a good thing. If they didn’t pay the bonus, the written off tax provisioning would boost all members returns during accumulation as other members convert to pension.

 

I think for some funds they are more of a marketing factor which I don't like - it should be calculated based on an individual's particular circumstances and actually reflect a bonus for the improved tax position of the fund.

Some funds just do fixed amounts etc. which feels a bit dodgy - good for the member who accesses it I guess.

 

ALL super is pooled. The only exception is a single member smsf as then its 100% of course. Despite pooling, each member merely holds fractional specific volume at their specific cost as underlying interests in any investmnets made whether chosen by the member or trustee. There is one exception of the taxed earning basis. Many larger funds invest in PSTs as a element of the fund. (Pooled super trusts). These are special vehicles used by super trustees (often common across many funds to set the investments aside and to allow one lage PSTs that has investmnets made by dozens of funds and millions of members. PSTs may be managed by a specialist like Vanguard used to) That entity pays tax like a company despite it being a trust. Its a fixed trust. . The fund / member gets a share of income and also the tax credit so its considered taxed before the member gets a share.

Tax doesnt get written off. It either applies to a member account...or doesnt. Tax is calculated for each MEMBER event. Members dont share in tax. Heaps (its estimated at 80% plus) of members aged 60+ pay tax on earnings through choice or lack of understanding. They leave their super in accumulation when a pension could end the tax. There are merits to this and also a cost.

Pension bonus amounts are a maketing gymick. Funds reserve a (very small) element of what otherwise would be member income. A while back funds used to be accumulation and a pension fund often not offerred by some funds. As pensions evolved rapidly aftre the 1990s and super reforms boosted super savings funds commenced to offer accumulation and pensions. The bonus was a way to keep members by waving a carrot in their face. Each fund seeks actuarial advice on how much the reserve should hold and adjust it annually up and down to ensure it caters to expected pension take up. Some funds dont pay it.

There are other forms of reserves too eg smoothing reserves to boost bad years from some undistributed income in high income years. There was also an anti-detriment reserve in some funds. Anti-D was an arangemnet based on old tax law. When Keating changed pension tax from on withdrawal to on contributions it left a gap for some members who complained it wasnt fair on death so funds were required to hold a reserve to compensate those members for 15% of some of the tax paid in their life. 2017-2019 law changes phased it out as it was being manipulated.
Paying superannuation death benefits | Australian Taxation Office

 

Yes.

The assets you are invested in still form part of the funds pool for actual fund taxation but their internal accounting tries to mimic unpooled taxation outcomes for direct members. Direct is the only offering where this individualised treatment to the member level occurs. Everything else involves upfront provisioning of tax against gains and returns on that provisioned pool of funds being allocated non-transparently, presumably its broken down to investment option level but who really knows. Maybe they pay for their advertising, promotion, executive lunches/functions etc out of those returns. May be being a bit over cynical with those last comments however I really wish they would stop sponsoring sporting teams, it ruins the game when you start thinking where did the money for that come from?

One thing you can know is that if you are a long term holder, creating no capital gain expenses, your investment option unit price is the same as somebody who switches regularly. A passive buy and hold investor should not want to share their tax outcomes with active investor types.

Direct is pooled funds attempt to mimic direct taxation outcomes through internal accounting.

SMSF is legislative direct taxation.

 

Exactly! Trustees acting in the best interests of the beneficiaries hey...

‘Red flags’: Maritime Super defends spending on union events (smh.com.au)