Four ways super funds can make the most of tax experts

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28/09/2017

OPINION | Large superannuation funds are increasingly exploiting the many implications of tax compliance via the expertise of their tax staff and advisers.

This trend was apparent at the annual Tax Institute National Superannuation Conference, held on August 24-25 in Sydney.

Here are four different aspects of tax professionals’ expertise with which super funds are engaging.

A healthy relationship with the ATO

It is a priority for all funds to manage the Australian Taxation Office as a large industry stakeholder.

 The ATO takes what it calls a “justified trust” approach towards how it deals with large market players, including those from the superannuation industry.

Justified trust is a concept borrowed from the Organisation for Economic Co-operation and Development that suggests tax enforcement agencies should ask themselves the question: If we told the community how we assured the tax paid by a taxpayer, would they be satisfied we did enough?

ATO deputy commissioner for superannuation, James O’Halloran, told the Taxation Institute conference that his office would be conducting risk assurance reviews of all 78 of the largest superannuation funds in the country over the next four years. One reassuring fact is that the industry has a good reputation with the ATO, with large super funds generally seen as managing their risks well.

Funds should use their tax staff and advisers to understand where their organisation sits on the ATO’s risk radar and how well prepared it is to withstand scrutiny. O’Halloran expressed the ATO’s preference to be involved early and proactively in merger discussions between funds.

Gauging an appropriate risk appetite

Funds need to ensure they have a well-developed and up-to-date understanding and articulation of their tax-risk appetite. KPMG director, tax transformation, James Gordon, described tax management as a pervasive organisational risk for super funds. He said many large funds have been busy formulating their tax-risk appetite, which should be embedded into a broader risk-management strategy.

A recent Deloitte survey (covering 12 funds and about $350 billion in assets) concluded that the majority of tax professionals within super funds now have the confidence of their trustee board.

The conference also heard about two interesting new areas of tax risk that may represent the next frontier for funds to manage. Firstly, the conference discussed risks related to how the Australian Prudential Regulation Authority would view a fund’s efforts, in its role as a good fiduciary (an SIS Act requirement), to manage the tax impacts of investment strategy and reporting. The second area was the risk to funds from the global trend towards more tax transparency, which is pressuring organisations to demonstrate they are paying their fair share of tax.

 After-tax outcomes

Many super funds still need to improve their after-tax investment outcomes to ensure their members get the best possible net returns.

Cbus Super and QSuper were two of the earliest funds to recognise the value of embedding tax thinking into their investment processes, so conference attendees welcomed insights from Cbus Super after-tax specialist Daryn Loo and QSuper tax manager Prashanthen Ranjit Kumar.

The challenge for tax specialists working within funds is to perform the important due diligence required for unlisted, structured investment opportunities – where tax skills can add much value – without neglecting the opportunities to bring an after-tax lens to much larger pools of the fund’s capital; for example, the average 46 per cent of a fund’s capital that sits in listed equities.

An edge in innovation

 There are big advantages to adding the perspective of tax professionals to discussions about how to promote innovation within funds. Separate presentations by a number of PwC partners, and another by Rice Warner chief executive Michael Rice, addressed how many challenges facing the industry would require innovations. This includes the need to design better retirement-income solutions.

Funds should not assume tax professionals are only technical and details-focused with no ability to innovate. Indeed, a fund’s tax team and external advisers often get to see how different elements of a process or solution fit together and this broader perspective can be useful for innovating. Also, the frequent changes tax professionals must deal with make them an asset to funds needing to embrace change and the dynamism of the industry.

Raewyn Williams is managing director of research at Parametric Australia, a subsidiary of the Seattle-based funds management and portfolio services firm Parametric Portfolio Associates.