Pension “tax bonuses” – take care with member equity | KPMG | AU

Pension “tax bonuses” – take care with member equity

Pension “tax bonuses” – take care with member equity

Dana Fleming and Ross Stephens discuss the issues arising from the introduction of pension bonus by some industry super funds.

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One of the significant benefits that self-managed superannuation funds (SMSFs) and many retail super products have long enjoyed over industry funds and other funds that do not segregate assets at member level has been the ability to deliver the member a ‘tax bonus’ upon moving from accumulation to retirement phase. This ‘tax bonus’ is essentially the result of the removal of the tax liability on any unrealised gains associated with the member’s account in the fund at that time.

Over the last 6-12 months, we have seen a number of industry funds attempt to level the playing field by introducing a pension ‘bonus’ upon moving to retirement phase.

Some of the issues arising from the introduction of a bonus feature of this kind include:

  • How (if at all) should funds differentiate between members in growth options that contributed to the growth in the deferred tax liability, and members in cash options that did not?
  • What will be the fund’s policies if the fund is in a deferred tax asset position at the time of transfer?
  • What changes may be required to the fund’s unit pricing or crediting rate systems as a result of introducing the bonus.

At their core, all of these issues require assessment by the fund’s trustee of the implications for broader member equity. For example, if a fund decides to also provide the bonus to new members joining the fund from other funds immediately or a short time before transferring to retirement phase, could this be viewed as effectively providing a benefit to these new members at the expense of the fund’s existing members? It is not inconceivable that the Australian Prudential Regulation Authority (APRA) may have concerns with such a decision.

As funds seek to identify new strategies for member retention, the provision of pension bonuses is likely to form part of more and more funds' market offerings.

It is critical that funds undertake comprehensive work streams to address not just the tax issues, but all relevant issues within the broader business, including legal, regulatory, investment operations, member communications, etc. We have worked with a number of our clients to ensure these issues are appropriately and holistically addressed.

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