Home' Superfunds : Superfunds August 2014 Contents Superfunds August 2014
eturns for super fund members are
generated after tax and fees. While
the impact of rising and falling markets
and cost on returns seem relatively easy to
understand, tax is a lot more complicated.
Boards willingly spend time on governance
over investments and costs, putting many
questions to management. However, for
what is often the biggest expense in a super
fund’s profit and loss, tax is the poor cousin.
Its complexity is, unsurprisingly, no excuse in
the eyes of the regulators.
The Australian Taxation Office (ATO) and
APRA have made their views clear. Boards should
understand the broad impact of tax throughout
operations and be able to ask questions to
manage and monitor tax risk.
Questions relating to tax compliance and after-
tax performance management are intuitive and
readily get an airing. However, what are relevant
questions for boards to ask regarding tax risk in
In order to ask questions, boards need to have
an understanding of the tax risk trigger points.
This requires, firstly, an intuitive understanding of
how the interaction of market movements and tax
impact on returns and, secondly, a comprehension
of the risks inherent in the process.
TAX RISK TRIGGER POINTS
The fundamentals of how the interaction of
market movements and tax impact on returns are
summarised in Figure 1.
In terms of understanding the tax risks
inherent in the process, there are two approaches
to accruing tax in unit prices: a ‘bottom-up’
approach and a ‘top-down’ approach. A bottom-
up approach builds tax on the basis of actual
transactions, as they occur. A top-down approach
accrues tax using effective tax rates (ETRs) –
initially estimating tax and regularly ‘truing up’
to the superannuation fund’s best estimate of its
actual tax position, as this unfolds throughout an
The balance of this article focuses on the top
down approach. Figure 2 shows the key steps in
the process of accruing tax in unit pricing using
ETRs, and the associated decisions. Or, to put it
another way, the tax risk trigger points.
In August 2008, APRA and ASIC jointly issued
the Unit pricing: Guide to good practice, to
provide guidance on this issue to superannuation
funds. In the context of accruing tax in unit prices,
the guiding principle can be distilled as whether
the decisions made are reasonable, justifiable
and produce equitable and consistent outcomes
for members. With this principle in mind, each
of the three steps in Figure 2 are examined in
more detail in Figure 3. Of these, Step 3: setting
funding policy is often the most challenging.
Setting funding policy
Multiple options exist for funding income-
tax payments made via the quarterly business
activity statement (BAS), (until the final position
is determined on completion of the annual tax
Two options, regarding the investment tax
component only, are contrasted below to draw
Figure 1: Understanding how the interaction of market movements and tax impact on returns
In a rising market, tax negatively impacts on returns
(except for pensioners).
As returns increase, the tax liability on both capital and income yield increases.
In a falling market, tax positively impacts on returns
(except for pensioners).
As returns fall, the tax liability on the capital yield firstly decreases, and in a severe
correction, the tax liability on the income yield is exceeded by a tax asset on negative
Tax always positively contributes to returns for
pensioners, and is not directly related to falling or
Although pensioners are exempt from tax, they are eligible for a tax credit in relation to
imputation credits associated with franked dividends. The level of credit is only linked to
franked dividend income yield, not changes in market value.
In a falling market, a deferred tax asset capping
policy is critical.
As a deferred tax asset (on negative capital returns) is non-cash backed, a policy must be
put in place to ensure equitable outcomes between generations of investors.
The impact of significant events needs review.
The method of accruing tax in unit prices can produce distortions when significant events
occur, requiring manual adjustment to remove.
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