There has been a lot of interest from readers of Cuffelinks on the potential impact of the Labor Party’s proposed changes to imputation credits, particularly for SMSF members and self-funded retirees. It has highlighted differences in understanding of how super funds are taxed and the strategies available to members seeking more control over how they invest their super.
Myriads of super choices offer different levels of control. Before individuals choose a strategy, it’s important that they consider how much responsibility they want to take on themselves, the investment choices on offer, the types of features they need and how much they’re willing to pay for them.
Here are some of the key differences between retail wrap accounts and the ‘direct investment options’ offered by leading industry funds, and the potential impact the proposed changes might have on these options and SMSFs.
What’s the difference between a direct investment option and a wrap?
Typically, wrap accounts offer a broader range of investment options and fund manager choices, as well as having additional flexibility regarding transfers of assets (e.g. in-specie shares). Given the complexity and range of investment offerings, they are designed to be accessed under the guidance of a financial adviser, who can provide personalised advice on the best mix of assets for each individual. Some providers offer direct access to their platforms to retail investors but the fees can be prohibitive for members who may not be interested in, or don’t have the knowledge or capability to, navigate a large investment menu.
With the direct investment option offered through AustralianSuper, called Member Direct, members can choose from shares in the top 300 companies listed on the ASX, a selection of exchange traded funds (ETFs) and term deposits. Members can combine these with the managed options and dial up or down how much of their portfolio they want to invest directly themselves. The investment menu is more limited in comparison to wrap accounts and there are trustee-prescribed investment limits to encourage members to make investment choices that maintain diversification.
Our research shows some members want the control of managing their own money, but also want the comfort that comes with having some of it professionally managed. On average, members in Member Direct invest around 30% of their portfolio themselves, while keeping the remainder invested in the Fund’s professionally-managed diversified options. Some members see the option as a stepping stone to an SMSF, while it provides others with greater control and flexibility over their investments in an APRA-regulated fund.
Who offers direct investment options and how do they work?
Direct investment options are offered by a number of leading industry funds. Members buy and sell investments on an online platform, which is operated by a third-party who also provides execution services, market news, data and research. Investors need to be a member of the fund and invest a portion of their portfolio in the fund’s other investment options.
While direct investment options may not offer all the bells and whistles of some wraps, they may be a lower cost option for people wanting to be more involved in managing their super portfolio. They offer features like real-time trading, high interest cash accounts, dividend reinvestment plans, independent company research and consolidated tax reporting.
Accumulation members can also retain the benefit of the low-cost insurance cover they have through their super fund. While the Member Direct option doesn’t currently allow in-specie transfer of shares held outside the Fund, members can transfer shares from a Member Direct accumulation to Member Direct retirement income account without incurring capital gains tax on unrealised capital gains.
How are franking credits managed and how might Labor’s proposed changes affect members?
Based on announcements that have been made to date, the impact of Labor’s proposed changes differs according to the tax-paying status of each superannuation vehicle.
AustralianSuper is a single taxpayer which pays tax at the entity level rather than the individual member level. It pays a significant amount of tax on its contributions and investment income derived from assets that support member balances in the accumulation phase.
The Fund uses its total franking credits to offset the total tax liabilities it pays. It achieves this because the assets supporting each investment option across the accumulation and pension phases are combined in the one entity. The franking credits are then allocated to the investment options that have exposure to Australian equities. For example, franking credits received in the Member Direct investment option are attributed to members in the option so they receive their respective benefit of the credits.
While the Fund remains a significant taxpayer, the proposed changes are not likely to materially impact investment returns. By contrast, other funds that have low or no investment income taxed in the accumulation phase, low or no taxable contributions and have a high exposure to Australian equities are more likely to be negatively impacted by the proposed changes. For example, SMSFs that don’t have sufficient tax liabilities to fully offset imputation credits may lose the benefit of the cash refund. Under the proposal, SMSFs that have at least one member who was receiving a welfare pension (such as the age pension) before 28 March 2018 will not lose the benefit of the refund.
Tom Garcia is Head of Product and Communications at AustralianSuper. AustralianSuper manages more than $132 billion of members’ assets on behalf of more than 2.2 million members. More than 14,000 members invest in the direct investment option, Member Direct.
This information is general information which does not take into account the personal objectives or needs of any investor. Before making a decision about AustralianSuper, you should think about your financial requirements and refer to the relevant Product Disclosure Statement.