Australian Super member direct

Discussion in 'Shares & Funds' started by pippen, 19th Oct, 2019.

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  1. pippen

    pippen Well-Known Member

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    Hi gang, just noticed austsuper have a couple lics along with a much better line up of domestic and international etfs in its member direct option line up.

    Just wondering if any of you have gone down the member direct path???

    Currently have the austsuper DIY (Australian shares and International shares option).
     
    Last edited: 19th Oct, 2019
  2. APINDEX

    APINDEX Well-Known Member

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    Hi Pippen,
    I have member direct have bought few direct holdings and VTS in there.
    Also took @The Falcon suggestion for a cheap DIY growth portfolio in Aus Super doing your own AUS/INT split I'm happy with results so far
     
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  3. RogTheBear

    RogTheBear Well-Known Member

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    I have a similar thing, but not with Australian Super. All the LICs and ETFs I'm interested in are there, and it's simpler/cheaper than an SMSF structure - although obviously it's just on an individual basis.
     
  4. dunno

    dunno Well-Known Member

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    Hi @pippen

    I have no firsthand experience with "members direct" but it’s been on my list to try and get a bit better understanding of it.

    With a SMSF you are subjected to individual tax treatment according to the relevant laws. There are some very nice tax benefits, for example deferred tax liabilities that remain in your account to be compounded etc.

    Pooled super funds are taxed at the fund level and returns are apportioned. Some of the individual tax benefits seem to be subject to risks of poor equality between members or at least are very non-transparent. Recent introductions of things like “balance booster” when moving to an income account seem to be attempts to rectify problems with allocation to members.

    The member direct approach is interesting as although the fund is still taxed as one entity the allocations seem much more directed to mimicking individual tax outcomes.

    But still you are reliant on the fund’s rules not tax legislation for inter-member equality and their rules could change arbitrarily.

    There is lots of idiosyncrasies, between tax and allocation of the standard fund offerings, the member direct offering, and the SMSF taxation rules. I’m going to explore these to get an understanding because I know the difference little things make over the long run. It’s not just costs today but future costs you are locking in that need to be considered.

    The first question I have is are you likely to exceed the 1.6M cap by the time you retire? I know it’s a long way out but having more than the cap in members direct is probably the most substantial difference I saw on a first glance between direct members and what would occur in a SMSF.

    As I start looking into members direct – I am starting with the attitude that if you go with a super fund, the active balanced/growth fund that they most closely tie their reputation to is the best bet. Otherwise do your passive in a SMSF for individual tax transparency. My concern is that Members direct is a compromise that is best at neither. Hopefully I haven’t already made my mind up before I start digging.

    I would be happy to see others digging into this subject, a shared effort in understanding maybe.
     
    Last edited: 20th Oct, 2019
  5. pippen

    pippen Well-Known Member

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    Cheers for the detailedresponse @dunno, currently have circa 200k at 36 years of age and maxing out 25k annual limits and given a decent return for the next 20 years with my 25k per year maxing of the limit should see me go very close to the 1.6 mill cap at around 55 to 60 year of age.

    Several ppl at my work are around the 1mill mark and have just been in balanced since they started employment but have always made a salary sacrifice arrangementand have been given a company match to around 20% in total.

    I just wonder how these folks would go given sequence of return risk and having there portfolio cut in half and then redeeming and selling units when unit prices are at there lowest?????

    Im very very green on the whole super world and time and time again i hear ppl tell me i shouldnt add a cent to it but i get a significant employer match and have no ppor debt and can still save around 50k outside super and given im still pretty young having this super compound will benefit me down the track! Even if they keep changing the goal posts!

    Cheers
     
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  6. zyea

    zyea Member

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    Sunsuper’s eqv to AusSuper DIY has vanguard index funds. There’s a whirlpool forum but if you replicate VDHG in Sunsuper it works out to be $78 in fixed fees and 0.189% in variable (above $800k balance it caps at $800k*.189% = $1,512) so max fees of $1,590 pa for balances $800k +
     
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  7. dunno

    dunno Well-Known Member

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    You are in great shape there Pippen. Well done. Definitely a potential need there to think about the cap in years to come. I wouldn’t worry about those ppl giving you advice on super. It will always stay tax advantaged to some extent and you seem to have it balanced within your bigger picture. Eventually those ppl will hit preservation age and wish they were listening instead of talking in their conversations with you way back when.

    Let’s start digging by looking ahead to

    Transition to pension phase:

    Pooled funds, this covers your current Aus and International options I believe: Units are post tax, A balance Booster is available to try and even the field between fund level accounting and individual member accounting. I can’t find too much on the calculation details for Australian super, I have seen more detail from other funds. My gut feel at this stage is the balance booster is more a token marketing effort and doesn’t compensate accurately. Passive holders are most likely undercompensated, active switchers that may settle in the last little period are possibly over compensated.

    Retirement Bonus | AustralianSuper

    Members direct have seamless transfer which avoids the problems that balance booster is trying to fix. It’s a good step forward in fairness but it is limited to the Cap.

    Seamless transfer - Member Direct | AustralianSuper

    If you had 2 million in members direct, you would have to sell down 400K before you could make the transfer.

    [You don’t directly own the investments you hold in member direct; they are owned by the superfund and form part of their single entity accounting – therefore I suspect they hold balances for you at member level. But the actual investment lots are not reserved for you. What’s this mean – you have an average cost base but not access to individual parcels to pick the highest cost parcels for tax minimisation. (perhaps somebody with members direct can confirm if you buy the same investment multiple times, can you pick in future what lot to sell or do you just have a single averaged deferred tax amount against the investment.)]

    The summary of the above paragraph is that, in the lack of being able to find the detail, I assume you have to sell at your average cost base rather than picking the most tax effective lot.

    Lets assume your 400K sale has a cost base of 200K (you’re a passive holder of diversified ETF accumulating over 24 years, your average cost base is going to be fairly low). If you could pick the later lots your cost base would likely be higher say 300K. That is why this seemingly insignificant detail of how members direct works could end up being significant.

    Not knowing how they treat parcels, I will split the difference and say the cost base is 250K to continue the comparison.

    So you have to sell your 400K with a cost base of 250K to get below the limit to do the seamless transfer. You will have to pay tax of $15,000. (150K discounted by 2/3rds and taxed at accumulation rate of 15%)

    In contrast the SMSF can just transfer 1.6M of the 2M to a pension account and incur nothing in the way of CGT, the remaining 400K just stays in accumulation. You completely avoid the 15K tax required above to make the transition.

    If by chance you wanted the 400K in cash that the members direct example above ends up with, you could sell in the SMSF after establishing the pension account and pro-rata the tax payable between pension and accumulation and pay 0.4/2 x 15K = $3,000 tax. In all likely hood it would be less because you can pick most tax efficient lots in a SMSF.
     
  8. pippen

    pippen Well-Known Member

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    Thanks for the kind words @dunno as well as taking the time and effort into looking into these options! I will definitely have to contact Aust Super and see if i can get some guidance and answers in relation to the above!

    Very thought provoking tho!

    I guess im getting there slowly but surely but i dont really want to change horses mid race and incur taxable consequences so i guess i really need to think of the older me at 55 or 60 even tho life is unknown whilst trying to maintain that work life balance and saving investing and living balance too!
     
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  9. Hoang

    Hoang Member

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    @dunno QSuper has uncapped retirement bonus which is very nice compared to other funds. but again money in pooled funds is set aside for future capital gain tax liability and not invested so it loses the benefits of compounding. You get all the money back but it's not compounded i think
    SMSFs is certainly the way to go to avoid this problem, but fees are high
    Member direct seems to be a good option too but it's not clear how it works. Do you know if money in member direct is set aside for future capital gain tax liability or not? or it remains in the account for compounding?
     
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  10. dunno

    dunno Well-Known Member

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    Hello @zyea

    Thanks for your post. I had a bit of a look at the whirlpool thread on Sun Super. Seems to be quite a few keen on this path. There also seems to be a few other low cost even zero cost DIY index funds available from other Industry super funds. To me though whilst all the talk on the forums seem to be about diligently looking at option expenses they are missing the elephant in the room which is member allocations are after a tax accrual for unrealised gains.

    I will attempt to put up a spreadsheet when time permits to explain.

    In the meantime just to bed down the expense input for the calculations I get Sunsuper Admin @ $78 plus 0.1% of assets capped at 800K and variable expenses to match VDHG @ 0.11%
    Have I made a mistake?

    upload_2019-10-21_13-4-19.png
    upload_2019-10-21_13-4-58.png

    upload_2019-10-21_13-21-39.png

    I've split the VDHG 6.5% global small between hedged and unhedged.
     
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  11. dunno

    dunno Well-Known Member

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    Hello @Hoang

    Welcome aboard - looks like you have a handle on what the potential issues are.

    I'll have to add Qsuper to have a look at. There seems to be big differences with how different funds operate their retirement bonus. Some are very limited and some are very vague on the calculations many still have nothing.
     
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  12. RogTheBear

    RogTheBear Well-Known Member

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    Just for reference, the direction option I'm in has about 60 LICs and 150 ETFs of various sorts - plus the usual ASX 300, all sorts of managed funds and managed portfolios. I haven't seen anything discussed in this thread by way of LIC or ETF that's not available. And though I balk at paying an asset-based fee to hold shares, it is in super, so less tax on earnings - and it's really pretty low all up.
     
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  13. Hoang

    Hoang Member

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    which super fund is that?
     
  14. Nodrog

    Nodrog Well-Known Member

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    Of interest also. I haven’t really looked at Industry Super funds in detail as yet. Because in the SMSF I have two pensions and an accumulation account and the wife will soon have one pension and an accumulation account I’m assuming we would end up with FIVE separate accounts all with fees starting from scratch if we moved to an Industry Fund.

    At present my thinking is to stay with the SMSF but have a plan in place if I kick the bucket / suffer a permanent severe disability etc and my wife would rather not have to keep the SMSF going but move to a set and forget Industry Fund Pension / accumulation.

    If I did move to an Industry Fund I would stay away from members direct and choose preset options. This then provides diversification other than LICs/ ETFs which are in the personal portfolio outside of Super.
     
  15. dunno

    dunno Well-Known Member

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    Sun Super comparison to VDHG in a SMSF.

    Sun Super costs as above post.

    SMSF admin costs as per my actual. BGL360 software $220, Audit $495, Supervisor levy $259 = Total $974. VDHG investment expense = 0.27%

    Assume 4% income return and 6% capital return. Accuracy of assumption not that important, what is important is that returns assumption for both are identical as they are both meant to be indexing the same thing. We are isolating the tax accounting of the different structures. Variable investment costs subtracted from the income component.

    $200K opening balance and 25 years of accumulation. For simplicity – no additional contributions and obviously no withdrawals. DRP for VDHG. Compounding of income in Sun Super is automatic.

    Sun Super Model.
    upload_2019-10-21_14-54-7.png
    Plus you get a $4,800 retirement bonus.
    upload_2019-10-21_14-54-56.png
    upload_2019-10-21_14-55-30.png

    Grand total = $1,729,962 after tax.

    VDHG in SMSF Model
    upload_2019-10-21_14-57-59.png

    CGT will need to be paid. After allocation of 1.6M to a pension account $16,487 CG tax would be payable. (1,878,452 - cost base of $766,205 x 10% x pro rata between accumulation and pension account)

    Grand Total = $1,861,964 after tax

    Despite the higher expense ratio for VDHG and higher admin costs for the SMSF, VDHG in the SMSF models out to provide an extra $132,000. Taxation of the structures is the elephant in the room that not many seem to have their head around.
     
  16. ChrisP73

    ChrisP73 Well-Known Member

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    Reduction of unit prices by deferred cgt amount for accumulation accounts definitely appears to be a ‘penalty’ for passive holders in pooled super funds. Impact worse for those who’ve biased their supper to ‘growth’ assets eg international equity vs Aussie equity. Haven’t done the sums yet but possibly not quite so bad if you consider regular contributions (vs SMSFs)

    The question is, who’s being disproportionately compensated in this deal?
     
  17. dunno

    dunno Well-Known Member

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    That’s the million-dollar question.

    Or in the case of Australian Super who has a $3.256 Billion deferred tax liability and assuming they have the funds invested in their default option which returned 8.67% last year. It would be a $282 Million dollar question.

    I have never seen anything that transparently spells out how this money is allocated. So one can only guess.

    Some of my guesses – reducing fees on index options – you see all the theories that industry index options have explicit low expenses because they use derivatise etc yardy yar yar – My bet is they are simply subsidising the expense in an attempt at equality for these options with the earnings from the deferred tax liability funds. I suspect their will be a race to zero for index options – some funds are already there.

    If you look in the fund financials, administration costs are normally more than the administration fees charged to members, the slush fund covers this shortfall and allows them to market on low explicit admin fees.

    Haven’t I seen super funds sponsoring sporting teams – wonder where those funds come from? My cynical guess.:cool:

    The funding of the reserves…… Building up and depleting of reserves has lots of ‘equality over time’ issues.

    What's left – pro-rata over all members????? Perhaps the pro-rate is broken down to the option level???? Without the funds telling you how they do it it’s just a guess. None of my grips amount to potential illegality under the law, they have the scope for some discretion, it just lacks transparency on how member allocations are done. Ironically the index options probably don’t get any of the pro-rate return from deferred liability earnings because their return is set to the index. If there is favouritism on allocation towards any fund type, I think it would be to a funds headline option which they want to show a good return for their reputations sake.

    And the final moral of the story.

    You don’t want to be drinking water and splitting the bill equally with a bunch of **** heads that hit the top shelf spirits and wine. (you don’t want to be investing like @pippen or @Snowball and splitting your deferred liabilities with this mob.
    Just went 95% cash in Super - Share Market Correction

    If everybody invested passively and didn’t unnecessarily switch all over the place the superfunds deferred liabilities would be even higher, the tax man poorer and there would be more capital working for members, but the allocation transparency would still need to be addressed
     
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  18. Snowball

    Snowball Well-Known Member

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    Well, just after I thought I’d made a decent decision for once, out comes @dunno and blows my fantasy away :D:eek:
     
  19. sash

    sash Well-Known Member

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    One of the reasons why i chose Host Plus. When you move to Pension mode in Australian Super my understanding is that you actually incur CGT. Where in Host Plus you don't...you need to dig deeper.

    There is some myth around indexed funds...they don't always perform as some have stated.

     
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  20. dunno

    dunno Well-Known Member

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    Ha Ha. (I'm from head office and I'm here to help!)

    I did see your latest blog and wondered if your plan for super might be more efficient in a more member centric tax environment, hence tagged you in.

    Seeing this thread is about Australian Super member direct, I have whacked a few assumptions and guesses from your blog into the comparison.

    Indexed International (Unhedged) in Sun Super.
    upload_2019-10-21_21-6-51.png
    plus a $2,040 retirement bonus.

    85% VGS 15% VISM in Australian Super Member direct. (investment cost 0.201%)
    upload_2019-10-21_21-23-51.png

    As this outcome is under the cap you could transfer all to a pension account tax free with the seamless transfer option.

    Now I would double and triple check everything that some Muppet on the internet posts, but this prelim model looks like around a future 55K efficiency advantage may be the starting point for further investigation.

    ps.
    thanks @sash, your post made my day, you may never understand why it tickled my fancy so much.
     
    Last edited: 21st Oct, 2019