Australian Super member direct

Hopefully I won’t confuse further -but probably will. I can’t work out how to make this simple, probably why the issue has stayed hidden for so long. Although members direct is a huge step forward even though it is marketed more as choice being the selling point, rather than being a better tax environment for passive investors.

Abbreviated tax effect SMSF accounts.

Things to note Deferred tax liability account in 2018 balance sheet is 4% of total Assets.

I think this seems reasonable for a passive investor. It would require $625,000 worth of unrealised capital gains being accumulated whilst $937,500 worth of contributions and earnings were accumulated. 4% is less than my actual deferred tax liability percentage, so I think the guess is reasonable.

Only one member (or a few with same investments) so no confusion with allocation to members. Simply after tax profit goes to members and deferred tax liability account increases – but no actual tax payment for CGT made. If the assumption is made that member is turning 60 a pension account can be commenced and the tax liability on 1.6M of the assets will disappear. The members balance will increase, and the tax liability decrease by about 1.6/1.75*$74.5K = 68K

Simulating the larger pooled fund based on previous SMSF scenario


This time deferred tax liability is 2% in the 2018 balance sheet. This is slightly more than Australian Supers actual %. The % drops because a lot of what Australian super does is active and a lot of the members act in an active manner. Pooling helps them to an extent balancing incomings and outgoings but the overall moral for a passive investor is you don’t want to split the tax bill with active. The drop in the deferred % between the two scenarios would have been paid to the tax office over time for realised capital gains at a fund level.

This time because there are so many different people investing different ways – the gross return figure would be calculated at the option level applicable to the individual investor (12.7%) . A pooled tax deduction is then subtracted (1.6%) and these % are applied to member balances. This leaves the highlighted yellow amount which is earnings on capital supporting deferred tax liabilities. This figure has to be allocated somehow, reduce fees, increase declared return rates or accumulated in reserves. There is no transparency on how this is done that I have found. I doubt indexed option returns will be declared higher than index returns, but fees do seem to be subsidised. Active funds probably get their return enhanced by declaring higher returns. Who really knows how they distribute it, it looks like a slush fund, it smells like a slush fund and to allocate it in a way that vaguely resembles equality in how and by whom the deferred liability is built would be beyond complex.

A lot of the expenses (amounts correspond to actual % from Australian super financials) in the P&L for tax calculation are back charged to the actual member accounts or investment options. To the extent that they do not recover all fess directly the figure in yellow DTL earnings is consumed.

The tax payable in the pooled fund is higher for the same reason the tax deferred liability is lower being some of the capital gains in the period have been realised.

The final tax deferred liability amount just prior to turning 60 is lower than the individual tax treatment, but it’s still probably well above what the switch mechanism gives you. We know the SunSuper calculation is $4,800 for a 1.6M balance. Q Supers unlimited is interesting but It would still likely only be an apportion based on your balance and the pooled funds balance which is lower because of everybody else’s activity. Ie you could possibly get the full figure in green buy you wouldn’t get the 70K odd in the SMSF example that your induvial investing accounted for.

The actual member benefit difference allocated in this single year example because of tax is $6,852. (It could be lower depending on how the earnings on DTL capital is allocated). The difference keeps compounding so the assumption that both scenario's have a 1.5M starting member balance is unrealistically flattering to the pooled example. The larger figure of transition to pension liability forgiveness is a one off – both of the issues together create a substantial long term impact – far bigger than they few % points people are diligently chasing in lower fees.

I hope some others can help me get out of this complex bog and get the message into a simple format so we can spread the word to those that don't necessarily want to understand tax effect accounting in pooled super funds but just want to make efficient decisions for long term indexing with their super money.

 

Stepping back from trying to prove it in all the complexity above.

(If you don't follow the accounting for yourself, this is just one random fool on the internet’s opinion)​

In summary.

The benefits of individual tax treatment trumps superficial low cost. (by a lot)

If you are in accumulation mode and you want to take a passive index approach you are better off paying the members direct platform fees and standard ETF MER fees than going an index option in a DIY mix where units are allocated post tax even if the fees are zero.

If you are likely to end up near or above the pension transfer caps then consider a SMSF for ultimate individual tax treatment and control, otherwise the direct member option with their simulated individual tax treatment should be simpler, lower cost and suffice, I guess one risk that ING has highlighted is the dangers of fee increases once CGT makes moving difficult. Changes as to how the Direct Member option simulates individual tax treatment and other rules are also at the whim of the fund rather than requiring changes to legislation as for a SMSF.

 

Thanks for the analysis. I’d already decided to stay with the SMSF based on much simpler reasoning but after reading this thread I’m even more convinced this was a good decision.

 

Thanks @dunno - another huge contribution.

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This really is the dilema. Maybe a progressive pooled super fund will find a way to deal with this (particularly for passive investors). A good first step would be for some transparency at the option level around tax payed and deferred tax % allowances. What's the trigger though?

I think you've done more than enough.

For me, I'm continuing to probe sunsuper and hope to find some time to do some independent analysis (at least enough to satisfy myself) and researching SMSFs. I think you used the phrase "hasten slowly" which is definately applicable in my case .

 

Did a comparison of vanguard wholesale australian and international index shares funds and index options from sunsuper.

Only looked at 12 month performance (I've attached the spreadsheet with source data and calcs for sunsuper)

Sunsuper unit prices are downloaded from website, vanguard performance as per the website after tax performance tables (currently at date 30 Sep 2019). I think the comparison is like for like (returns are allowing for investment management and transaction costs) - happy to be corrected if someone think otherwise.



Unless I've screwed up, looks like the super fund outperformed on the australian equity and underperformed on the international equity. Presuming that the underlying investment really are equivilent (no guarentee really), then I can only assume it is because different tax provisions have been allocated to the two options (reflecting the current and deferred tax liabilities of each option).

SunSuper was able to confirm that tax provisions are determined at the option level and that tax is provisioned within the daily unit pricing process reflecting both current and deferred tax liabilities, so that "switching members compensate existing members for the tax liability that they have incurred when entering/leaving an option". They also confirmed that they (re)calculate the estimated investment tax position of each investment option on a periodical basis throughout the year to confirm the appropriateness of the effective investment tax rate(s) applied for each option.

In reality though - I'm still no wiser as to what's going on

If I get some more time soon I'll look at time periods greater than 12 months. In the meantime if anyone sees any issues/flaws please let me know.

 

I've now completed the dataset for 3, 5, & 10 years. A few gaps in sunsuper unit prices from their website (and the pension version of international index only commenced 30th June 2010) so I've had to use the relevant index data to estimate the unit prices for a few months in 2009/2010



Interesting results. Over 10 years the difference ranges from 0.25% to 0.43% in favour of vanguard wholesale funds in an SMSF (putting admin fees aside which I've determined are ~roughly~ equivilient for a two member SMSF).

What's really puzzling me is the performance difference between the indexes in pension mode (tax exempt entity). In theory these should be much closer in performance than the funds in the super funds (15%).

Any theories? I've attached the speadsheet the data.

 

@ChrisP73 - might have to do this exercise all over again if SunSuper and QSuper merge...

QSuper and Sunsuper in merger talks | Investment Magazine

What are the chances??

 

I'm ready for this: Vanguard plans to tackle locals in super

"Vanguard, the US funds management giant that disrupted funds management and financial planning when it pioneered low cost index investing, is drawing up plans to manage the superannuation assets of Australians.

The plans would take advantage of changes resulting from the Hayne royal commission, which triggered a huge shift in savings from retail for-profit funds to non-profit industry funds, and bring the $8.3 trillion firm founded by the legendary Jack Bogle into direct competition with local players."

It's frustrating how superannuation costs are so high. Where are the DIY super funds with expenses (roughly) in line with buying ETF's from the ASX? Even Aus Super member direct (which I'm considering switching back to from hostplus index option) has fairly high monthly admin fees.

As someone early on in the accumulation phase I can't help but think super is ripe for disruption. Am I mistaken?

 

You are confusing an investment (Vanguard) and a super fund administration cost.

If Vanguard were to launch with a fund it would also have additional administration fees beyond the investment fees embedded in each return. Investment costs cover office space, staffing, investment managers for the fund portfolio, computer systems, call centre, docs and reporting, audit etc and custodian security of all investments as well as trading support services (whether or not you use them !!) ....Staff will assist member requests, changes, manage insurances and tasks like allocation of contributions etc. A small fund would face very very high costs versus a super fund like SunSuper. Even now they are in merger talks with QSuper with a view to be efficient and shave back end costs which impact competition.

There are several sources to compare fees but its not that simple. Chant West do a excellent job, Canstar to a lesser degree but there is general guidance elsewhere as well such as ASIC. Generally speaking an industry fund tends to offer lower fees that other forms of super funds and the size of the fund may assist lower costs. ChantWest look at a range of factors such as staff sizes etc. A SMSF doesnt incur fees as such but has operating costs such as accounting / admin, audit, asic fees, bank chgarges and other direct costs. These tend to be rather flat and whether the fund has $1m of $100K the costs will be largely similar. What can disguide costs in a smsf is that brokerage is not a separate cost but is a element of the cost / proceeds for each transaction. Public offer funds (incl industry funds) tend to all reflect fees as a tier based on balance so that the fee tapers off with higher balances rather tha a flat fee which may discourage larger member balances.,

Aussuper has a $395pa fee for member direct v other options. Plus brokerage + TD fees + Cash fees. Member Direct | AustralianSuper
Click on Fees
A smaller member balance would find this and the brokerage very costly where it may be insignificant on a $1m account.

And comparison of performance cant occur since the member specific choices dictate returns.
The member is punting their choices are better than qualified teams of investment professionals. Their timing of when to buy or sell may also affect performance where a full time manager and their team attends to portfolios by the minute. The costs of engaging fund manager advisers as a advisory panel etc is also a member cost and there is no credit given to members who go direct so you are paying twice.

 

I think you would see huge inflows into a vanguard product as an alternative to both industry and retail funds.

Considering their effect on the managed fund game and the fact many funds already outsource to them i would back them to offer a product at a price point below the current industry funds price point.

 

No idea why pension mode comparisons are so far out.

The disadvantage of paying unrealised capital gains as you go only extends to the accumulation stage where you have a tax rate. If the passive universe for Vanguard and Sun super are the same, then returns for Sun Super in pension (tax free) mode should be the same. It would indicate the passive universes are not the same or at least haven’t been in the past??? or something else weird with crediting rates is going on.

Isolating just the tax effect from the return outcomes if the universes are not the same, or their are other unknown variables would be impossible.

Maybe the cleanest way to see the issue is that there are no differentiated allocations within options for length of holding. If you have been diligently accumulating in a single index option for the last 10-20 years without causing the fund to incur any actual capital gains, the capital backing the deferred tax liability attributable directly to your actions would be significant. But your crediting rate is exactly the same as Joe Blow who just switched in. This would not be the case with individual tax treatment. The tax saved and the compounding earnings on those savings by not causing capital events is all attributable to you.

 

Didn't Sunsuper only start partnering with Vanguard recently? Definitely within 5 years.

Sunsuper partners with passive fund manager Vanguard

 

Pat the Shuffler did a Superannuation series on his blog and contacted Sunsuper as part of it. Their response regarding the International Unhedged Index option was....

"[T]he Vanguard product tracks the MSCI World Ex Australia Index (with approx. 1579 underlying holdings), whereas the Sunsuper Option (also managed by Vanguard) tracks a different Index, the MSCI World Investable Markets Index (IMI), ex Australia. This is a broader Index, which means the Sunsuper option has over 5700 holdings."

So different Indexes would probably go some way to explaining some of the differences in returns.

ETA: Assuming of course Chris compared Sunsuper to VGS

 

Keen beans to see what Vanguard does in the Super space. I wonder how far away this product will be?

 

Thanks @PKFFW that could definately explain one source of difference. I used the vanguard wholesale international - which is equivilant to VGS (MSCI World Ex Australia Index) for the international index investment comparison.

 

Thanks @Zenith Chaos another good reason why the underlying investments/indexes may be different for the 10 year results.

 

Some now known thanks to @Zenith Chaos and @PKFFW, and likely others still unknown!

It seems the best comparison (based on the variables we do know about) is the 5 year ASX300 index investments. But, the .34%p/a difference for the pension structure isn't able to be explained! Pushing this observation to the xfiles for a moment, the difference between the super structure and pension structure yields 0.51%-0.34% = 0.17% p/a so that's the best datapoint I can determine as the impact of DTL in this particular pooled fund option over the last 5 years. Maybe I'm way off the mark, but it's a stake in the ground.

Totally understand. This was just my feable attempt to quantify the actual impact of deferred tax liability in a real world example (that would at least be relevant for me!). Even though its apparent that there are other variables (as above some now known thanks to @Zenith Chaos and @PKFFW, and likely others still unknown), it has been a useful exersize for me.

Regardless of the other variables including underlying indexes etc, given, if I were to move from Sunsuper to an SMSF, I would choose an ~50/50 split using these two vanguard wholesale funds (ASX300 and MSCI World Ex Australia Index unhedged), and the relative returns are what they are (at least for this historical period in time/duration). If gives me a sense of the total magnitude (in total current day $s) of the possible bottom line variation and allows me to make an informed decision if it's worth the hasssle of us moving to an SMSF structure. I'll continue pondering on this but appreciate others input and thoughts.

 

Haha, yes with the vanguard annoucement and sunsuper/qsuper announcement its been an exciting couple of days.

I doubt it will make any difference though. As per comments from @Paul@PFI, I excluded administration fees from my comparison as they are capped in sunsuper and not a material difference between these and admin fees for SMSF (even if DIY).

I just compared buy/sell entry/exit unit prices (which are inclusive of the impact of investment fees, DTL, buy/sell spreads, indirect etc). A merged qsuper/sunsuper would likely still have index options. The asset/index investment mangement fees are independant of the trustee/admin.

 

@dunno Just on this point, sunsuper indicated adjustments to exit and entry prices to attempt to achieve a level of equity between fund members.

The DTL is still invested, so if the bulk is never actually realised and CGT not incurred (depends who you're buying rounds with doesn't it ), the impact to long term returns is possibly reduced.

I havn't attempted to model this yet, but thought it worth mentioning.

Interested in your thought on this.

 

Until this point I have tried to resist SMSF but I'm concerned with the effort involved, even if I stick to a 3 fund portfolio. However, the tax inefficiencies are not insignificant.

Does anyone know in terms of hours in a year it would take to do the administration / compliance for an SMSF, that is excluding the buying and selling of equities etc? I'd like the low fee option, which I am guessing means more DIY.