From July this year, most employees will have the right to choose their superannuation fund.
Michael Hutton explains what this will mean for small business.
In broad terms, employees not covered by a state industrial award (apart from Western Australia) and those not covered by a workplace agreement, will be able to choose their own fund under the new legislation.
Employers affected will need to give employees a Choice Form by July 29, 2005 for them to nominate a complying superannuation fund. The form will record a default fund for contributions by employees who do not nominate an alternative. When the employees Choice Form has been completed and returned, the employer has two months to commence contributions into the nominated fund. Employers who fail to provide a Choice Form can be fined up to $500 per employee. However, the Australian Taxation Office (ATO) is expected to show some leniency in the early stages of the new legislation.
If an employee does not complete the form, the employer can use the nominated default fund, a requirement of which is likely to be a level of life insurance. This has not yet been legislated but is being discussed. After July 1, 2005 new employees must be provided with a Choice Form within 28 days of employment. Employees nominating a superannuation fund are responsible for opening the account. They are also required to arrange to roll over their existing superannuation into the new fund. If the employee has already chosen a fund within the last 12 months, the employer may refuse to accept a new nomination. For a small business, the extra payroll, accounting and administration will be quite considerable. Potentially, the number of superannuation payments each month or quarter could match the number of employees.
The payment of employee superannuation is not as simple as paying salary and wages into an employee’s bank account. Superannuation funds often want to control the collection of contributions to be sure that they allocate them correctly—that means individual payments for each fund member.
These can be:
• A direct debit out of the employer’s bank account, collected by the superannuation fund. This is fine as long as the contribution amount remains the same each quarter.
• By cheque along with deposit slips for each employee, or BPAY.
• By payroll transfer system, where the data is sent electronically. Superannuation funds typically only set this up if there are sufficient numbers, which for small businesses is usually not the case.
Complying with all the different options and payment methods will mean a substantial increase in the administration burden on employers, especially around October. The legislation will prove especially costly in the first few months of operation. Small businesses will have to cope with much more paperwork than their current super recordkeeping, and will need to implement new systems. For some businesses, additional staff may even be required to help set up the new approach, adding to their operating costs.
While the new legislation gives control over your own super, your choice should consider underlying investment choices, insurance options and fee structure, and should be reviewed regularly.
The three main types of superannuation fund to choose are self-managed superannuation funds (SMSF), industry funds, and retail funds.
SMSFs are the fastest growing area of super, with many small business owners establishing them. An SMSF will give you control over where funds are invested and you will be able to access a much wider choice of investments, including direct property.
SMSFs offer you more flexibility in regards to contributions, investment earnings, and retirement options. They also enable you to run business planning parallel with retirement planning, as well as optimising the member’s tax position.
On the negative side, the cost of establishing these funds can be around $2,000 and the administration involved may be a burden.
You’ll also need time plus investment knowledge and skills to act as trustee of your own fund, as well as an understanding of the rules that govern SMSF. ATO surveys indicate that SMSF investments tend to have greater allocations to term deposits and cash, which means they are not achieving the growth they should.
SMSFs will also incur annual accounting and audit costs. These costs range from $2,000 to $5,000 depending on the complexity of the fund and the underlying investments. When this is added to investment costs such as brokerage and managed fund fees, an SMSF can be expensive. If the fundÌs balance is less than $200,000 it is probably not very cost effective.
Industry Superannuation Funds have received favourable press based on their good returns and low fee structure. Many large and small businesses currently use industry funds, and they are appropriate for many employees, especially those with lower superannuation balances. There are several things to look for in an industry fund. Some have a very limited range of investment options, typically being ‘conservative’, ‘balanced’ and ‘growth’.
A ‘good’ industry fund allows members to select an investment weighting in each asset sector, and has at least four fund managers for each of the different asset sectors. Some industry funds also invest in assets such as direct property developments. Investigate who makes the investment decisions, and check their investment expertise. Look for a fund that uses external investment advisers to assist with the investing.
Some industry funds out-perform others in poor investment years. Some returns of the fund are smoothed each year, which means the fund holds a reserve so that it can declare a reasonable earning rate in poor investment years, and so reducing the allocation to members in good years.
Industry funds generally have a low fee structure because there is no adviser fee and the investment choices are limited. Be alert to funds that claim nil fees or only a small administration fee, as these funds take out the investment fee prior to declaring the return. This can make it difficult to compare fees with other funds.
Also check if life and TPD (total and permanent disablement) insurance cover is available with this fund. You should be able to get a certain level of cover automatically through an industry fund, and at a low cost.
Typically, retail superannuation funds are run by banks and managed funds. Some of these have been criticised recently for having high fees. It is important to look at returns as being net of fees so that true comparisons can be made.
The many retail funds offer a wide range of investment choices. The more flexible of these are ‘wrap accounts’ or ‘master funds’. The range of investment choices offered through these are usually at a lower fee than investing directly in a retail product fund. For those wanting to have more control over the investment of their super, wrap or master funds are a good alternative to SMSF and industry funds. An important point of differentiation between retail and industry funds is the payment of commission or a fee to an adviser. Superannuation is a complex area, and employees should check what their adviser is receiving in fees from their superannuation balance, and what level of service they receive for this.
The advice given by an adviser can be very valuable and their knowledge can help their clients achieve a more satisfactory result. Super choice is another reason why financial planners are needed.
* Michael Hutton is the financial planning partner with accountants and advisers HLB Mann Judd Sydney.