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Government to extend CGT rollover relief to merging superfunds


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Thursday, 10 May 2012:  Deloitte applauds the decision of the Federal Government to extend Capital Gains Tax (CGT) rollover relief for superannuation funds that merge over the next five years to 1 July 2017. “The Cooper Review carefully studied the industry and the way in which superannuation was delivered to millions of Australians. It made far reaching recommendations including the introduction of MySuper, the no frills low cost superannuation offer for the many Australians who do not actively choose a superannuation fund,” said Wayne Walker, Partner, Actuaries & Consultants Deloitte.

“The Review also concluded that there were clear, demonstrable, and substantial scale economies in superannuation whereby larger super funds could generally deliver equivalent performance at a lower cost to members than otherwise identical smaller funds,” he said.

“In fact the numbers in the final report of the Review suggested that consolidation in the superannuation industry, with smaller funds merging to form larger more sustainable funds, would deliver as many benefits to many Australians as the other recommendations.”

Walker explained that over the past year, the lack of rollover relief has put many potential mergers on indefinite hold, and put others that had been agreed at risk. “Without this relief, those funds intending to merge could only do so if they were prepared to effectively write off their deferred tax assets.

“These assets are substantial for many funds and can amount to as much as 2% or even more, of total fund assets,” Mr Walker said. “To write this asset off is a major decision that in the short term would translate into lower account balances for those members changing funds.

“This is something trustees are reluctant to do. The Government’s decision therefore, to extend rollover relief removes a major barrier to efficient consolidation among super funds. It is to be applauded. Scale economies do exist.”

The Cooper Review concluded that due to the scale benefits in superannuation, trustees of all funds should periodically satisfy themselves that their fund has sufficient scale. “Nevertheless the Review quite properly stopped far short of mandating any threshold fund size that would be an automatic trigger for a fund merger,” Walker said. “The reasons for not going further are clear and include:

  • Despite the empirical evidence that there are scale economies in both operating and investment costs, this does not always result in post-merger fee reductions.
  • Evidence is mixed on whether larger funds do deliver superior net long term returns to members than smaller funds. “What is certain is that the investment strategy decisions taken by trustees and their advisers have the potential to far outweigh scale benefits,” said Mr Walker.
  • Fund mergers are not the only way to capture scale benefits. “Outsourcing services to third parties is something that many funds already do to achieve scale benefits,” he explained.
  • Walker also pointed out that “some of the better performing funds are small to medium sized funds.”

So what does this mean for trustees?

Trustees need to consider whether their fund has sufficient scale to deliver competitive services and performance to members both now and into the future. They also need to ascertain whether the fund has sufficient resources to invest in their offer to members.  

There are a number of ways for trustees to capture scale benefits including merging with other funds. “That is one way,” said Walker.  “Nevertheless for many funds it is possible to access scale through partnership with service providers including administrators, asset managers and insurers. A fund’s competitive position and the value it delivers to members must be regularly and objectively assessed on a case by case basis.  Then trustees can come to an informed decision and act accordingly,” he said.

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Deloitte
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Stephen Huppert
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Deloitte
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sthuppert@deloitte.com.au

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