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Australian Federal Budget 2021 22 – Highlights and key measures.

Government emphasises spending to bolster economic recovery underway.

IN BRIEF

$106.6 billion deficit with net debt to peak at $980.6 billion by June 2025
GDP growth forecast at 4.25% in 2021-22
Unemployment expected to fall to 4.75% in mid 2023.

The estimated 2021-22 Federal Budget deficit is $106.6 billion falling to $57 billion in 2024-25 with net debt predicted to peak at $980.6 billion (40.9% GDP) by June 2025.

The Federal Budget includes a bold GDP growth forecast of 4.25% in 2021-22 with unemployment forecast to fall to 4.75% in mid-2023.

1. $1.9 billion vaccine rollout

The government is investing an additional $1.9 billion in the vaccination program including funding to distribute and administer vaccines, record and monitor progress, communicate key public messages and support states and territories in the roll‑out

2. $17.7 billion to improve aged care

The government is allocating additional funding of $17.7 billion for a comprehensive aged care reform package in response to the Royal Commission into Aged Care Quality and Safety. This will include another 80,000 new home care packages, increased time nurses and carers spend with residents, support more than 33,000 new training places for personal carers, a new indigenous workforce and additional $10 per resident per day payment to enhance the viability and sustainability of the residential aged care sector.

3. Patent box with 17% tax rate for new patents

A patent box is being introduced to encourage businesses to undertake their R&D in Australia and keep patents here. The patent box will tax income derived from Australian medical and biotech patents at a 17% effective concessional corporate tax rate.

4. Cessation of employment removed as tax point for Employee Share Schemes

A patent box is being introduced to encourage businesses to undertake their R&D in Australia and keep patents here. The patent box will tax income derived from Australian medical and biotech patents at a 17% effective concessional corporate tax rate.

5. Full expensing and loss carry back extended to 2023

Temporary full expensing and temporary loss carry-back are being extended for a further year to June 2023.

6. 5,000 additional higher education short courses

7. Low- and middle-income tax offset extended to 2022

The low- and middle-income tax offset (LMITO) is extended for a further year to June 2022. Around 10.2 million individuals are expected to benefit from retaining the offset, worth up to $1,080 for individuals or $2,160 for dual income couples.

8. New bright-line test for individual tax residency

The government will replace the individual tax residency rules with a new, easier to understand framework that provides certainty and reduces compliance costs for globally mobile individuals and their employers. The primary test will be a simple ‘bright line’ test: a person who is physically present in Australia for 183 days or more in any income year will be an Australian tax resident.

9. $450 per month minimum removed for superannuation guarantee

The government is removing the $450 per month Ordinary Time Earnings threshold for the superannuation guarantee.

10. Women’s budget

As expected, the Budget also included new measures to improve women’s safety, economic security, health and wellbeing with a $3.4 billion package. This includes $1.1 billion in funding for women’s safety; $1.9 billion to support women’s economic security including $1.7 billion to improve the affordability of childcare for Australian families and $351.6 million in women’s health and wellbeing measures

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5 steps for doing a superannuation health check

Regardless of how far off retirement is for you, it could be beneficial to regularly check that your finances are on track.
Taking the time every now and then to check in on your superannuation could end up making a significant difference to the size of your retirement nest egg. For example, if you’re one of the many Australians to have withdrawn money from your super recently under the COVID-19 Superannuation Early Release Scheme, a check in could help you identify strategies for getting things back on track.

Here are five super health-check steps to consider, no matter what stage you are at.

1. Take a look at your fund’s performance

The extent to which your super balance is growing is arguably the biggest factor in determining how financially comfortable you will be in retirement. If you are working, your employer generally must contribute regularly to your chosen super account, or you can make additional contributions yourself. But just as important is how fast your super is growing due to investment returns.

Your chosen fund invests your retirement savings on your behalf with the aim of growing your balance. However, funds can vary significantly in what they deliver to members in investment growth, so it’s important to keep an eye on how well your fund is performing on your behalf.

You can do this by checking your regular super statements for performance information to see how your funds performing.

Remember superannuation is a long-term investment, so paying attention to performance over longer time-frames, such as a 10-year period, may give you a better idea of how well your fund is positioned to deliver growth into the future than just looking at one year of performance data. That said, investments can go up and down over time, so a strong past performance isn’t necessarily indicative of good returns in the future. This means it’s important to consider performance alongside other factors.

2. Check you’re not paying too much in fees

Super funds charge a range of fees to their members. These can include administration fees, investment costs, fees for advice they provide and potentially other fees which will be listed on your super statement. When you see the amount of fees you’re paying each week, month or even annually, it might not look like a massive amount, but over time fees can eat away at your balance and limit the amount of money that’s earning investment returns for you. What may look like a small percentage difference in the fees you’re charged per year could potentially translate to tens of thousands of dollars of retirement funds saved or lost by the time you’re eligible to cash in your super.

3. Evaluate your investment options

It could also be a good time to ask yourself if your super is being invested in a way that suits your life stage, appetite for risk and even your values and ethics.

Most super funds offer their members a range of options for how their savings are invested. These options can include growth, balanced, conservative, or a ‘life stage’ option which changes your investment mix as you get closer to retirement. Many funds also allow members to tailor their investment to focus on particular sectors or asset classes such as property or bonds. You may even have the option of setting up your investment mix to only invest in ‘ethical’ companies or to filter out certain industries that you want to avoid – common examples can include companies involved in the extraction or processing of fossil fuels, or the gambling industry.

Whatever approach you take, it’s important to consider the possible implications different investment options could have on your retirement. For example, could your investment choices mean greater certainty but more modest returns, potentially higher returns but more risk, or even higher fees depending on the investment option you choose? It could be worth speaking to a financial adviser to help you answer these questions.

4. Check in on your insurance

Now could also be a good time to take a look at what, if any, insurance cover you have in place via your super fund. Many funds offer a level of insurance by default when you open an account. This may include life insurance, total and permanent disability cover and income protection.

If you are covered as part of your super, consider checking to what extent. For example, how much money would your named beneficiary receive if you pass away and they make a successful claim? Will that be enough? How much of your income would be replaced if you became unable to work? What exclusions, waiting periods, limits and other conditions apply? And importantly, how much are you paying in premiums each week?

Again, it could be worth getting financial advice when thinking about these questions and how they apply to your personal circumstances, as changing your insurance cover, or cancelling it completely, could leave you and your family unprotected if something goes wrong.

5. Think about some of the other super opportunities you could take advantage of

For example, you may want to ask yourself questions such as:

If you have more than one super account, could you consolidate them into one to help save on duplicate fees? Just remember to consider what you might lose – insurance cover, for example – if you close an existing account.
Could you contribute more in super, either by ‘salary sacrificing’ from your pre-tax pay or making an additional contribution after tax to top up your balance?
Should you take a closer look at your pay slip to make sure your employer is contributing the appropriate amount of super?
Is there financial advice you can access through your super fund? The cost of this may already be covered by what you pay in fees.
Would it be beneficial to set a reminder to check in on your super again in a couple of months, or even the next time you get a statement from your fund? A regular check-in could well help you stay on track for the retirement you want.

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How Much Super Should I Have?

The amount of superannuation you should have is a culmination of the contributions made into your super account, fees deducted from your account and the investment earnings within your account.

Contributions made into your super account may consist of employer contributions, salary sacrifice contributions, or personal (deductible or non-deductible) contributions.

Investment earnings are allocated to your member balance, based on the income derived and the capital gains achieved from your superannuation investment portfolio.

Fees within your account may be payable to your superannuation provider for administration and compliance. You may also be paying other fees, such as fees to a financial planner for strategic and investment advice relating to your super.

Average Super Balance By Age

The chart below illustrates the average super balance by age for men and women. Comparing your balance against the average can give you an indication as to where your balance stands compared to your compatriots.

In reality, the amount of super you should have is much greater than the average super balances shown in the chart above and the table below. If you were to merely track along with the average Australian super balances, you would be a far-cry from enjoying a comfortable retirement.

How Much Super Should I Have At My Age?

The amount of super you should have at your age depends on the age you intend on retiring at and how much super you are relying on to meet your retirement income objectives.

While comparing your super balance against other people your age does provide you with some indication of how you are placed, such a comparison is irrelevant in helping you achieve your retirement goals.

You are an individual with specific and unique objectives and desires. There are a myriad of factors that determine how much super you should have at your current age, such as your salary, whether you are an employee or self-employed and whether you have a bias to building wealth either inside or outside of super; to name a few. This is why it’s important to not be overly concerned with how much super you should have at a given age.

But, if you insist on correlating how much super you should have at your age with the average superannuation balance by age, then the table below can be used as a guide.

How Much Super Should I Have at 30?

Who cares how much super you should have at 30? The average male 30 years old will have about $33,000 in super and the average female will have about $26,000. But if you’re 30-years old and worried about how much you should have in super, then you need to get a life!

How Much Super Should I Have at 40?

By the time you’ve reached 40, you’ve probably questioned your choice of profession at least a dozen times, you may have even switched careers by now. But one thing is certain, you are still many years away from being able to access your super. So, stop thinking about retirement and start thinking about how to lead a more fulfilling life between now and then.

A 40 yar old female in Australia will have around $55,000 in super and a 40-year-old male will average $82,000 in super.

How Much Super Should I Have at 50?

Okay, so now is about the age where it’s time to start getting serious about your super. You’re probably at or around your peak career earnings, your kids have flown the coop and your savings capacity is at an all-time high. It’s time to escalate your investments for your impending retirement.

The average super balance for 50 years old men is $158,000 and $93,531 for women. But realistically that means bugger all. What’s really important is that you have your own personal financial plan in place, and you know exactly where you’re going and how you’re going to get there financially.

How Much Super Should I Have at 60?

If you’re 60, you’ve arrived! It’s time to push back that colonoscopy appointment and check-in with your super, because as soon as you blow out those 60 candles there are dozens of doorways that open for your super. Whether you’re working full-time, part-time or not at all, there will be at least one way you can begin using super to your advantage. Don’t delay, super strategies can be very beneficial between the ages of 60 and 65 and, believe me, you want to get onto it as soon as possible.

A female aged 60 in Australia will have an average super balance of $140,000 and a male age 60 will have around $254,000, but I know you can do better. That’s why you’re here, right? You want to learn the tips to boosting your super. Well, come on in!

The average super balance for 50 years old men is $158,000 and $93,531 for women. But realistically that means bugger all. What’s really important is that you have your own personal financial plan in place, and you know exactly where you’re going and how you’re going to get there financially.

Average Super Balance at Retirement

What is retirement? The retirement definition is evolving. Gone are the days of working with the same company for 35-years, then hanging up the boots and getting your gold watch. Retirement now involves reducing working hours, transitioning to retirement, accessing a bit of super here and there, doing some casual or consulting work on the side and then finally, eventually stopping work all together.

Because of these varied definitions of retirement, it is difficult to pinpoint an average super balance at retirement. But, if we agreed that, say, age 65 was a retirement age, then the average super balance at retirement is $270,000 for men and $157,000 for women.

A female aged 60 in Australia will have an average super balance of $140,000 and a male age 60 will have around $254,000, but I know you can do better. That’s why you’re here, right? You want to learn the tips to boosting your super. Well, come on in!

The average super balance for 50 years old men is $158,000 and $93,531 for women. But realistically that means bugger all. What’s really important is that you have your own personal financial plan in place, and you know exactly where you’re going and how you’re going to get there financially.

How Much Super Should I Have to Retire?

The amount of super you should have to retire is determined by three factors:

  1. The income you require your super to provide you with in retirement.
  2. The number of years you need your super to provide you with a retirement income; and
  3. The level of risk you are willing to accept with your super investments.

Your first step is to use a retirement calculator to determine how much super you expect to have a retirement. You then want to calculate how much income that super balance can provide you with throughout retirement. This is your starting point.

From there, you should then see how working longer, retiring sooner, increasing/decreasing retirement income or increasing/decreasing investment risk affects your retirement income and the longevity of your balance.

Retirement research shows that a couple requires $640,000 (combined) in superannuation and a single person needs $545,000 to enjoy a comfortable retirement.

A comfortable retirement lifestyle is defined as an income of $61,909 p.a. for couples and $43,687 p.a. for singles (increasing with CPI), including expenses such as leisure activities, a good standard of living, private health insurance, a reasonable car and electronic equipment, as well as domestic and international travel.

How Much Super Should I Be Paid?

An employer is required to make superannuation guarantee (SG) payments to employees on at least a quarterly basis. The current SG rate is 9.5% of your pre-tax salary or wage. For example, if your annual wage is $80,000, you should receive employer contributions of $7,600 for that year.

What Can I Do to Boost My Super?

There are a number of ways to boost your super. This can be done through additional super contributions, reviewing your superannuation investments or reducing your super fund fees.

Types of additional contributions include salary sacrifice contributions, personal concessional contributions and personal non-concessional contributions.

It’s important to seek advice to ensure you are making the right type of contributions to meet your needs and that you stay within the contribution limits.

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Is now the time to change your superannuation investments?

Not surprisingly, there’s been a significant spike in the conversation around Superannuation lately. Whether it’s protecting your growing nest egg from market falls and preserving wealth or trying to take advantage of the current volatility for some bargains, the interest in making a change has increased.

When considering whether to make the change, it’s a good idea to reflect on your motivation for doing so, before you make the leap. During times of heightened market volatility and falling share markets it’s quite normal to focus on the negative and extrapolate present conditions into the future.

The result is imagining the very worst outcome (such as losing all your money) and reacting irrationally. Emotion and good financial decision-making rarely work well together. 

If this is the situation you find yourself in, then it’s helpful to think of your goals and objectives and your investment timeframe and try to focus on the long term. Markets eventually rebound and if you have moved to cash or a conservative option, losses are then realised, and they can be very difficult to recoup. This is because you need to get back into the market and knowing when to do this and to have the confidence to do it will be problematic. 

If on the other hand you can take a step back and analyse logically the pros and cons of moving your money then you are more likely to make a better decision that you won’t regret. 

Free Superannuation Health Check

Research and Homework

Before making a decision to change funds or investment options, do your research. It’s important to understand the investment options available in your existing fund and their investment costs. If closing the fund, are there transaction or exit fees and will there be any loss of benefits such as insurance cover. 

If you are considering moving funds due to perceived poor performance, check that the performance is a result of poor investment management and not due to a more conservative investment option. You need to make sure you are comparing apples with apples. 

Like for like

If you are considering moving your super to a different fund but with a similar investment option to the one you’re in, and you are comfortable with the risk profile of that option, take a close look at the asset allocation of both funds. 

Not all funds are true to label. 

Some “balanced” funds invest say 65% in growth assets (such as Australian shares, International shares, listed property) and 35% in conservative investments including cash and bonds. Other “balanced” funds will have a split of 95% growth and 5% conservative, holding virtually no cash.

There’s no right or wrong in this, but if you aren’t aware that these portfolios are quite different and therefore carry different risks then you could be in for a surprise. The principle of investing is to be rewarded for risk – why else take on the risk if there’s no reward? But risk works both ways and whilst returns can be very positive when the markets are thriving, a high risk portfolio can experience significant falls during market turmoil. Make sure that when you compare the pair, you do a thorough job.

Should you switch now or wait?

After doing all your research and considering your options, do you take the plunge? 

It can take time for the actual transactions to be processed. Depending on the type of investment you have in your existing super fund it could take days or weeks for the proceeds of the sale to settle and be available for transfer. It then needs to be invested in the new fund.

Time out of the market during volatile times can impact returns and it’s important to understand that you could be selling “low” and buying “high” depending on how long the transfer takes. 

Of course, if the reverse were to happen and you sold high and bought low that would be a good outcome. Having said that, investors have found over the years that the most important factor is “time in the market” not “timing” the market so if you’re investing for 10, 20 or even 30 years, the above factors shouldn’t have a long term impact on your portfolio.

Finally

If you’ve decided to make the move, make sure you do the following:

  • Follow up on the transfer from your old fund to the new fund 
  • Give your employer details of your new fund (and check the contributions are being made).
  • Complete your death benefit nomination form to ensure it’s valid and your super goes to the right people.
  • Check your insurance is in place if you are taking out cover in your new fund.

It’s ok to make the switch if the fund you currently have is not working hard for you but remember, there’s a lot to consider.

If you are making important decisions that will impact your future self, try not getting distracted by chasing returns and the feeling of missing out. Do your research, talk to your adviser and if in doubt, hasten slowly.

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Superannuation guide for 2020/21

Changes in Super for 2020/21

It’s true the rules of our super system always seem to be changing and this year it’s no different.

Just when you think you’ve got all the rules and eligibility ages sorted out, they change again. And in the coming financial year there’s some important goal posts that are shifting for older super members.

If you’re wondering how the changes in recent years have affected your super and retirement plans, here’s a quick guide to the key changes and when they commenced.

The government has yet to legislate a number of significant proposals in relation to the super and retirement system.

These include a rise to the age limit for the bring-forward rules, introduction of retirement income products, changes to SMSF trustee numbers and three-year audits for SMSFs.

Super rule changes starting 1st July 2020

Super Guarantee amnesty for employers

Employers are being offered a one-off opportunity to disclose and pay any unpaid SG amounts under an amnesty program administered by the ATO. The amnesty (which runs until 7 September 2020), permits employers to lodge an SG amnesty form to disclose SG contribution shortfalls for their employees for any quarter from 1 July 1992 and 31 March 2018.

Employers taking advantage of the amnesty will not incur the normal interest, administration charges and non-payment penalties of up to 200%. They can claim a tax deduction for any SG payments made by 7 September 2020.

Removal of work test to age 67

From 1 July 2020, older super members will be able to make contributions into their super account without having to meet the requirements of the work test.

Following amendments to the SIS Regulations, fund members aged 65 and 66 can make personal non-concessional contributions into their super account without being gainfully employed for 40 hours in 30 consecutive days during the financial year in which they make their contribution.

Following removal of the work test requirements for personal contributions by super members aged 65 and 66, accompanying legislation is going through Parliament covering the rules for bring-forward arrangements.

This legislation will allow fund members aged 65 or 66 to use the existing bring-forward rules for non-concessional contributions to make up to three years of non-concessional contributions (3 x $100,000 = $300,000 in 2020/21) in a single financial year.

Increased age limit to receive spouse contributions

As part of recent amendments to the SIS Regulations, the maximum age at which an SMSF member can receive a spouse contribution has been lifted.

From 1 July 2020, spouse contributions can be made until the receiving spouse reaches age 75 (up from the previous age limit of 69). Receiving spouses aged between 67 and 75 will still need to meet the requirements of the work test.

Temporary reduction in super pension minimum drawdowns

The government has again reduced minimum drawdown rates by 50% for account-based pensions and similar products in the 2020/21 income year.

Early release of super

From 1 July 2020, super fund members can access up to $10,000 of their super account if they are affected by the adverse economic effects of COVID-19.

Under the temporary access rules, you can access up to $10,000 of your superannuation savings. Applications must be made between 1 July 2020 and 24 September 2020 and are only available to members in accumulation phase, not retirement phase.

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Australians who withdrew their super and now fear the tax office is coming for them

More than 2.3 million Australians anxiously withdrew up to $10,000 of their own money last financial year, with more expected to do so again in this one. However, despite waving these transactions through, the ATO is now threatening to recoup ineligible ones through taxes and heavy fines, having done little due diligence in the first place.

Early comparisons to the governments unlawful robo-debt scandal are already being made, as many are left scratching their heads over who should ultimately be penalised.

Some Australians admit they did the wrong thing, others say they have found themselves in the tax office’s crosshairs through no fault of their own.

These are the people who now fear they will become collateral damage in a scheme that was deeply flawed from the beginning

Some thought their application would actually be assessed by the ATO

When the scheme lowered the drawbridge on a heavily-fortified $3 trillion nest egg, many Australians didn’t realise quite how hastily it had been done.

Susan, a 32-year-old teacher, was one of them. As concerns around COVID-19 grew, she became “nervous and scared” she and her partner would lose their jobs and be unable to pay back around $6,000 worth of debt they owed on credit cards and to buy now pay later companies like Zip.

While she wasn’t quite sure whether or not she qualified to withdraw super, she applied anyway, thinking the ATO would ultimately make the call.

“At the time, I thought that if I wasn’t eligible [they] would deny the claim and that would be that. But they approved it,” she told Business Insider Australia.

“I never heard directly from the ATO about it, and I 100% did not intend to gain access to my fund fraudulently.”

She, like many others, may have inadvertently done just that – not knowing that the ATO did almost no DD of its own to verify claims.

The ATO itself has done little to correct this idea. It sent out more than 2.3 million notifications to successful applicants which read: “After careful consideration, we’ve determined that you are eligible”.

The tax office doesn’t explain that this “careful consideration” only pertains to outright fraud and theft, with even its effectiveness on that front under question.

Having discovered they were never properly assessed, Susan and others are worried fines will put them in a worse financial position than when they started.

Peter, another recipient also used his withdrawal to pay off old debts, wishes the government had been more transparent about the process.

“If I had been told that the ATO wasn’t actually looking at applications but would be coming after you with a microscope after the fact, I wouldn’t have touched the money in the first place,” he said.

Some aren’t sure whether or not they have broken the rules

While it’s pretty straightforward to tell if you have a job or have been made redundant, not all of the government’s rules are so clear cut.

Meet Adrian, a crane operator, who took out $10,000 while temporarily laid off. While confident he didn’t break the rules as a registered JobSeeker, he’s now concerned he might be pushing it if he applies for a second instalment, as he balances a volatile workload with welfare.

“I have always declared my earnings, and in the last month have actually been earning good money and haven’t received a JobSeeker payment [as a result],” he said.

“But this week, both companies have gone cold with work and I’m not guaranteed any work from either of them. It is always uncertain. One week I can take home $1,800 and the next $0, without any guarantee.”

With unemployment rising in the construction sector. Adam wants to access another $10,000 so he can keep paying his bills if work dries up for good, but he doesn’t want to run afoul of the law or risk a fine.

The ATO has not published guidance on complex situations like Adrian’s. Instead, it recommends people reach out for help if they are unsure.

“They should seek the assistance of a tax professional or contact us to let us know,” a spokesperson said.

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Impacts of COVID-19 on Superannuation

Like all industries, the superannuation industry is facing some immense challenges in light of the rapidly developing COVID-19 pandemic. Key among those challenges will be dealing with the fallout – both immediate as well as longer term – of the Government’s announced changes to superannuation settings as part of its economic response to the pandemic. But virtually all aspects of a superannuation fund’s operations will be impacted in some form or another. 

What are the Federal Government's changes to superannuation and what impact are they likely to have on funds?

As part of its COVID-19 financial assistance response, the Government will:

  • temporarily relax the rules relating to the early release of superannuation on compassionate grounds; and
  • temporarily reduce both the superannuation minimum drawdown rates and the deeming rates for social security payments.
Temporary early release

The Coronavirus Economic Response Package Omnibus Bill 2020 has been fast tracked through parliament and was passed on 23 March 2020. The package, which is now awaiting Royal Assent, will make amendments to the SIS Regulations to allow members to access up to $20,000 of their superannuation savings on compassionate grounds as two tax-free lump sums. Separate applications must be made for access of up to $10,000 in the 2019-20 financial year and a further amount up to $10,000 in 2020-21. Only one application can be made per financial year.

To be eligible to apply, members must:

  • be unemployed;
  • be eligible to receive a job seeker payment, youth allowance for jobseekers, parenting payment (which includes the single and partnered payments), special benefit or farm household allowance; or
  • on or after 1 January 2020:
    • have been made redundant;
    • have had their working hours reduced by 20% or more (including to zero); or
    • be sole traders whose business has been suspended or has suffered a reduction in turnover of 20% or more.

Individuals will be able to self-certify to the ATO (via myGov) that they meet the eligibility criteria and trustees will have no role in assessing the claim. Once applications have been reviewed by the ATO, the ATO will have the power to issue a determination to the member and superannuation fund as to how much can be released.

Following the receipt of an ATO determination, trustees will be required to pay benefits as soon as practicable, without requiring any additional application from members.

Interests in defined benefit arrangements are exempted from the new rules (although trustees of such arrangements can develop arrangements to provide early release in accordance with the new rules if they wish to do so).

This extended early release option will be available for a period of six months following the amendments coming into effect (currently expected to be mid-April), meaning members will have approximately three months following 1 July to make their 2020-21 application. However, as the Explanatory Memorandum explains, the Government may make additional amendments to the SIS Regulations to extend the measure beyond this timeframe, given the uncertainty as to how COVID-19 will progress.

Reduction in minimum drawdown rates for account-based pensions

Under the rules applying to account-based pensions, a minimum payment must be made from a pension or annuity product at least annually, which is determined by age and the value of the account balance at 1 July of each year. In a bid to help pension and annuity account balances recover from capital losses associated with the economic shock stemming from the crisis, the minimum drawdown rates for retirees will be halved for the 2019-20 and 2020-21 income years, meaning pensioners will be entitled to keep more money in the superannuation environment if they wish to do so.

Social Security deeming rates

A reduction to the social security deeming rates has also been announced in recognition of the impact that a low interest rate environment has on an individual’s expected savings income. From 1 May 2020, the upper deeming rate will be 2.25% and the lower deeming rate will be 0.25%, which the Government expects will mean an average increase of $105 to the Age Pension for the 565,000 people receiving it in the full tax year following the change.

Immediate considerations for trustees

The early release measure has been widely publicised in the media and forms a crucial part of the Government’s financial assistance response. AFCA has already announced it will modify its approach to dispute resolution to take the COVID-19 measures into account and trustees should be keen to ensure that they (and their administrators) are prepared to handle both the significant number of member enquires that we expect will arise following these announcements and the withdrawal process.

Quick and clear messaging to members will go a long way to helping manage the situation. Fund websites should be updated as soon as possible with information about the new rules, its implications and links to the myGov website outlining how members can sign up to myGov (if they have not done so already) in preparation for when the changes take effect. Information should also be published about the reduction in minimum drawdown rates where relevant, so that members can make a choice as to whether they wish to make changes to their drawdown amounts.

To ensure that the new operational requirement is met (ie that the benefit is paid as soon as practicable once an ATO declaration has been received), trustees should consider now how they will confirm member identities and bank account details before payments are made. Paying benefits by way of cheque should be the option of last resort in the current climate as this typically requires members to physically visit a bank branch.

Trustees should keep in mind that (subject to fund rules) the usual compassionate payment and financial hardship rules still apply and, sadly, an increase in applications for these payments is expected (with the potential for some members who meet the compassionate payment or financial hardship conditions, to be able to access their superannuation accounts under both the COVID-19 early release measure and the usual financial hardship rules).

A watching brief should also be kept on a possible increase in the number of low-balance accounts arising as a consequence of market movements or withdrawals, and trustees should ensure that their processes for transferring accounts to the ATO and applying fee caps under the PYS legislation remain robust.

Funds that believe the impact of the Government’s new measures (or the crisis more broadly) may result in a material change to fees and costs (including buy/sell spreads) will need to be conscious of the disclosure and notice implications of any such changes.

Lastly, there will be an important role for financial advice in supporting members who are considering whether to access their superannuation early (and take other steps such as moving investment options). Trustees should give thought to what steps they can take in either providing that advice (where they hold the appropriate authorisations to do so and have appropriate protections in place) or facilitating members’ access to advice.

What will be the impact on superannuation fund investments?

A flight to liquidity

It is already clear that the economic fallout from the pandemic is going to have a seismic impact on the way superannuation funds invest, at least in the short to medium term.

Aside from the obvious impact on asset prices of all kinds, and the significant and potentially prolonged dislocation of financial markets, perhaps the most significant short-term impacts will be a need for funds to proactively monitor and manage divergences from their strategic asset allocation bands, consider out-of-cycle asset revaluations for non-listed investments and seek additional liquidity (or at least understand their liquidity position and risk profile in more detail).

We see the need for liquidity as being driven by a range of interconnected factors, including:

  • Decreased contributions from members (driven by a rise in unemployment and underemployment);
  • Increased outflows from the new compassionate release rules (see above);
  • Managing foreign currency hedging programs (including necessary liquidity to respond to any margin call requirements); and
  • Members shifting into cash or defensive investment options.

Whilst those factors will clearly play out differently for various funds and segments of the market, depending predominantly on the makeup of their membership base, it is difficult to see many funds remaining entirely unaffected from a liquidity perspective.

A reminder on the SIS Act and other rules around liquidity

In light of that shift, it is worth reminding ourselves of what the SIS Act and Prudential Standards have to say about liquidity and to be aware of the following regulatory settings that touch on liquidity management:

  • The section 52(6) SIS Act covenant on trustees to ‘formulate, review regularly and give effect to’ a suitable investment strategy for the whole of the fund and for each investment option specifically calls out the need for that strategy to have regard to liquidity.
  • That covenant is built upon in APRA Prudential Standard and Guide 530 (Investment Governance) which articulates APRA’s expectations of trustees to maintain a Liquidity Management Plan, which particularly relevantly in the current setting, requires each investment option to be able to meet its cash flow requirements on a stand-alone basis (ie no ‘borrowing’ of liquidity from other investment options).
  • APRA Cross Industry Prudential Guide 233 (Pandemic Planning) also contemplates (in far less detail than SPG 530) the potential impact of a pandemic on fund liquidity and the ordinary operation of financial markets.
  • Regulation 6.34A of the SIS Regulations establishes a regime to deal with the circumstances under which the illiquidity of a particular investment option can be used to enliven an exception to the ordinary Three Business Day rollover and transfer requirements of SuperStream (although great care should be taken by funds in seeking to utilise that exception as it is very limited and requires existing disclosure to have been made to members in PDSs and consents obtained in application forms).
What are the likely impacts on existing illiquid and other private market investments?

When looking at what impact this will all have on super funds’ existing illiquid and other private market assets (by which we mean everything from private equity and hedge fund investments to direct and indirect property and infrastructure holdings), it is hard to avoid seeing the parallels to how the private funds world was impacted in 2008 and 2009 during the GFC.

In those (then) unprecedented months in the aftermath of the Lehman Brothers collapse, investors around the world were faced with one spot fire to deal with after another – a run on redemption requests, leading to otherwise liquid hedge funds and other funds imposing redemption freezes; fund managers becoming insolvent (and the subsequent impact on the funds and mandates that they manage); funds restructuring to address liquidity and other concerns; significant refinancing transactions; funds themselves becoming insolvent; an increase in secondary sale volumes; significantly lower fundraising levels and underlying assets in financial distress.

We can expect to see all of that, and potentially more, in the coming months given the breadth of the financial impact the current crisis seems likely to have on more or less all parts of every economy around the world.

The lessons of 2008 and 2009 would suggest that investors can’t foresee every spot fire coming their way in their existing portfolios. What they can do, however, is be prepared to react quickly and constructively as issues develop in their portfolio of private market assets. This includes:

  • ensuring legal records and other documentation are in order and easily accessible;
  • analysing and fully understanding their legal position for key funds and other assets in their portfolio in respect of key issues ahead of an issue arising (eg what their funding and future / emergency contribution obligations are; how exit and redemption terms work; what their key investor rights are; etc); and
  • being proactive and constructive in working together with fund managers and other investors to deal with issues in their portfolio as and when they arise (including being prepared to be creative in finding the best outcome, even if that means restructuring existing arrangements).

The silver lining is that this crisis, like that of the GFC, will pass and history shows that those investors who were on the front foot in managing their portfolios in that period (and, indeed, those who continued to commit to PE and other products in that period) ultimately fared comparatively well out of their private market portfolios. Here’s hoping history will repeat itself, at least in that respect, in 2020.

Other investment impacts

Of course, the impact of the pandemic on funds’ investments will not be limited to illiquid and private market assets – it is clear that all asset classes are being impacted in unprecedented and sometimes unpredictable ways.

From a legal perspective, many of the principles suggested for illiquid investments (preparation, understanding legal positions, etc) will equally apply to issues that arise for other asset classes.

Will the pandemic have an impact on upcoming regulatory change and the approach of our regulators?

We expect that our regulators will fundamentally shift their approach to recognise that funds and the regulators alike need to focus their efforts on the immediate challenges of COVID-19. Similarly, the Government’s focus is also likely to be on COVID-19 rather than previously slated reforms for the sector – and indeed those reforms won’t be able to be considered by Parliament until August (now the next sitting day).

Funds can expect five key impacts:

  • Many regulatory reform measures will be suspended. Funds will be able to pause or slow their preparations for a large number of upcoming regulatory changes. This includes reforms by APRA and ASIC – but funds will need to await further announcements from the regulators on some specifics. It also includes the regulatory reform agenda previously intended to go before Parliament in the coming months – such as Treasury’s Exposure Draft Bills to implement the last of the Financial Services Royal Commission recommendations (a number of which had been proposed to commence on 1 July 2020). Although the Government has not made an official announcement on the status of these reforms, in practice they will not be able to be considered by Parliament until its next sitting day (at the earliest) – which has been postponed to 11 August 2020.
  • Supervision activities will be refocused. The regulators will switch their supervision focus to managing the response to COVID-19, and other serious or time-critical issues. ASIC regards outstanding customer remediation as being in this category and will work with businesses to accelerate payments. We expect the regulators may temporarily cut funds some slack on other existing or pending investigations (but funds cannot assume the issues will go away in the longer term).
  • Relief from regulatory obligations may be available. ASIC has said it may provide relief or waivers in response to difficulties faced by funds in the current environment. We expect APRA to adopt a similar approach. We recommend that funds be proactive in seeking relief where needed.
  • New regulatory measures may be introduced to respond to COVID-19. We expect the regulators will be actively considering whether any COVID-19 specific measures are required for funds.
  • AFCA will consider COVID-19 circumstances when dealing with complaints. AFCA has stated it will take into account the unprecedented circumstances funds are operating in when considering complaints (including if firms are not in a position to quickly act on requests for information). It has also said that it will fast-track COVID-19 related complaints. Funds will need to be prepared to prioritise those complaints.

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What Is Dollar-Cost Averaging and why is now an ideal time to start?

By using Dollar Cost Averaging, investors can get their money working for them without having to worry about the daily ups and downs of the wider market

One of the biggest deterrents for new investors is the idea that you need a lot of money to get started. When you’re still learning the ropes, the thoughts of putting a significant amount of money at the mercy of the market is very scary.

However, there is a strategy that allows you to get skin in the game while you’re still learning and no is the ideal time to start

.

How does dollar-cost averaging work?

Dollar-cost averaging means that you invest a fixed amount of money into the same fund or selection of stocks at regular intervals over a period of time.

For example, a great way to start dollar cost averaging would be to invest $100 into an ETF that tracks the S&P 500 — like the Vanguard S&P 500 ETF (NYSEARCA: VOO) — on the first day of every month. Key to dollar-cost averaging is consistency. In order for the strategy to work effectively, you need to make sure you’re fastidious in your investing and add more money to your portfolio every month.

Types of Dollar-Cost Averaging

There are three primary types of dollar-cost averaging: Basic DCA, Value DCA, and Momentum DCA.

Basic dollar-cost averaging is, well… basic! It is the simplest type of dollar-cost averaging and means that you invest the same set amount of money (a fixed dollar amount) into your portfolio every week/month — regardless of other happenings in the market. Once you have decided on the amount you wish to invest and the frequency, all you have to do is decide what stocks the money will go into.

One important thing to understand with basic dollar-cost averaging is the relationship that forms between the number of shares you buy and the movements of the market. If the share price of the investment drops in one particular month, you will end up buying more shares because the amount you are investing is still the same. Similarly, if a share price increases, you will get fewer shares per fixed dollar amount.

With Value dollar-cost averaging, you still make regular investments on a predetermined schedule. However, the difference between Value DCA and Basic DCA is that the amount you invest changes depending on the performance of your stocks.

If the price of the stock(s) you’re investing in falls over the last month, you increase the amount of money you invest in it next time. If it rises, you decrease the amount. This means that you are increasing the number of discount shares you are getting by buying low and decreasing the number of expensive shares you are receiving by not buying when it’s high.

Momentum dollar-cost averaging is similar to Value dollar-cost averaging but flipped around. So in this case, you decrease the investment after a negative month and increase the investment after a positive month. This allows you to ride on the wave of upward trending stocks and focus less on underperforming ones.

What are the advantages of dollar-cost averaging?

One of the biggest advantages of dollar-cost averaging is that it removes emotion from the equation. Humans are constantly trying to look for patterns in the chaos and can often become paralyzed by decisions. Nowhere is this more evident than the stock market.

Take the recent COVID-19 induced volatility, for example. Many investors became obsessed with the day-to-day swings of the market, trying to sell high and buy low. While this makes sense in theory, it is an incredibly difficult strategy to execute in practice and often ends up with you losing more money than if you’d just done nothing at all.   

Dollar-cost averaging is often considered a hedge against market volatility. By consistently investing, you can take advantage of the average historical return of 10% that the market has experienced since inception in 1928.

Let’s use this as an example. If we are to assume that the market returns an average of 10% per annum, a $100 investment per month over five years would equate to just over $7,300 — $1,300 of which would be interest accrued on the principal invested.

When we push this dollar-cost averaging strategy out to ten years, it becomes a much-more impressive $19,125.

And what about twenty years? Well, if you managed to dollar-cost average for that long, you could be sitting on $68,730 at the end — almost $45,000 of which is interest accrued on the investment.

Not bad for a $100 investment per month, is it?

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Superannuation early access fraud scheme detected by Tax Office and freezes super scheme

The tax office has frozen applications for early access to superannuation after identifying instances of identity theft. More than 1.2 million Australians have applied to withdraw nearly $10 billion from their super accounts during the coronavirus pandemic.

The Australian Federal Police are investigating attempts to defraud the Federal Government’s early access to superannuation scheme.

Key Points

 

  • More than a million Australians are accessing their superannuation early
  • The Australian Federal Police are investigating fraudulent activity related to the early superannuation scheme
  • Labor’s financial services spokesman, Stephen Jones says the party will demand an explanation

Assistant Treasurer Michael Sukkar

Assistant Treasurer Michael Sukkar said “claims for early super would be put on hold while the allegations were investigated and we’ll undertake that process just to make sure there is nothing more that the Australian Tax Office could do”.

Home Affairs Minister Peter Dutton, who is responsible for various policing and intelligence agencies, said there had been no cyber intrusions within superannuation funds or the ATO.

Opposition Leader Anthony Albanese said the government was unwise to allow early access to superannuation and would damage people’s retirement savings, reduce the liquidity of super funds, and distort future market investments.

Tax Office Statement

In a statement, the Tax Office said it appeared people had their details used illegally in a bid to scam the program.

“This has been stopped and the impacted individuals are being contacted,” the statement said.

“The ATO’s online systems have not been compromised.”

Jeremy Hirschhorn, the ATO’s second commissioner, said ministers had “exhorted us to do our best” but had not suggested specific responses.

The committee heard that 1.1 million Australians have applied for access to superannuation, with $9.4bn of retirement savings approved for early release.

 “He used assumed 11 identities and 53 fictitious identities to submit 68 claims for government benefits … [the] total value of claims exceeded $70,000.”

The Australian Tax Commissioner said there had been about 1 million applications for early withdrawal approved, totalling more than $9 billion.

Government authorities have detected a “sophisticated” alleged fraud of early access to superannuation, which may have deprived up to 150 Australians of $120,000 of retirement savings.

On Thursday, Treasury, the tax office and the Australian federal police fronted the Covid-19 Senate inquiry to discuss the integrity of $194bn in three tranches of stimulus.

The Australian Taxation Office commissioner, Chris Jordan, confirmed “some limited fraudulent activity has been identified and immediately acted upon” in relation to impersonation to defraud workers of retirement savings.

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Covid-19 Super Access $10,000

If you are suffering from financial stress as a result of the coronavirus, you may be eligible to access some of your Superannuation.

Generally, you are unable to access your super until you meet a full condition of release, such as retirement or reaching age 65.

The coronavirus pandemic has caused many Australians to lose their jobs, or unable to continue earning an income sufficient to cover living expenses.

The Government understands the situation many people face and will allow temporary access of super

Covid-19 Early Access To Super

If you are eligible to access your super under these measures, you will be able to withdraw up to $10,000 prior to 1 July 2020.

Should you remain eligible, you will also have access to a further $10,000 after 1 July 2020 for a limited time (approximately 3 months).

This early access to your superannuation can alleviate some of the financial stress you are facing.

These Covid-19 early access to super provisions are expected to commence from mid-April 2020, with the exact date yet to be detailed.

Am I Eligible for Covid-19 Early Super Access?

To be eligible to access $10,000 of your superannuation early under these circumstances, you need to meet one or more of the following requirements:

  • You are unemployed;

OR

OR

  • On or after 1 January 2020:
    • You were made redundant,
    • your working hours reduced by 20 per cent or more; or
    • if you are a sole trader, your business was suspended or there was a reduction in your turnover of 20% or more.

Will it Affect My Tax or Centrelink?

Accessing your super early due to the coronavirus will not affect or be assessed against any other Centrelink or Department of Veteran Affairs (DVA) payments you might be receiving.

Furthermore, the withdrawals made from super under these circumstances will be received completely tax free.


How To Apply for Early Access due to Covid-19?

The application for early access is to be made through the MyGov Website.

You will need evidence that you meet the eligibility criteria noted above.

You may be able to contact your superannuation provider for further details, but they will not be able to help you with your claim.

In saying this, it would be a good idea, while the application is being processed, to ensure your super fund has your up-to-date bank details and proof of identity, so that payment is not delayed.

All processing of early release of your super due to coronavirus will be completed through the MyGov portal.

Once you have applied, the ATO will provide you and your superannuation fund with a determination. Only at that stage will your super fund release up to $10,000 of your balance.

You will not need to apply to your fund directly. The payment will be automatically made to you.

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