On the financial downfall of Borris Becker & what we can learn from it

Borris Becker was a bit of a childhood hero for me. My sisters and I used to stay up and watch Wimbledon on the colour TV and I can still remember the bloke thundering away at lesser opponents on the tennis court while winning Wimbledon back in the 80’s. There were other iconic tennis players throughout the years, but Becker stood out.

By any measure, the bloke made a tonne of money. Estimates range from $USD 25M and up just on court – serious cash from a time when a million bucks actually meant something. How could he go from those lofty heights to a 2.5 year jail sentence in April of 22 for breaching the terms of his 2017 bankruptcy?

The short answer is bad personal decision making over the years – particularly on the love / lust front. And now, all these years later that I have grown up to become a trained tax accountant, I wonder what can we learn from Becker’s wipe out? Here’s my top 3 things:

  1. Know your balance sheet – apparently Borris failed to disclose a whole heap of assets to the bankruptcy court. Interestingly, he claimed that he had “no idea” where a lot of his valuables were, including key trophies. A good idea for everyone is to sit down and commit their balance sheet to a simple excel spreadsheet. I spend a lot of time doing this with clients who thank me for illustrating to them in easy to understand numbers what their net worth actually is. 
  2. Simplicity is king – keeping things simple is the key to financially thriving. I have often said to clients that simply keeping their existing job, paying off their existing home, and focusing on getting to $1.7M per member inside their existing superfund is all they need to do to have a great financial life. In Australia, buying boring bank or supermarket shares is another key to financial success hiding in plain sight. However, this seemingly simple and straight path is often strayed from thanks the standard vicissitudes of life and the tendency for humans act on emotion rather than logic. Those who can act with equanimity and patience in the face of massive turmoil will ultimately win. 
  3. Romantic relationships have serious financial implications – Becker had a well-documented and pathological inability to stay faithful. With at least 3 different kids to 3 different mothers, it was kind of inevitable that his earnings and estate would be decimated at some point. It just happened sooner rather than later for him given the fashion in which he conducted himself romantically. I often say to a whole variety of people, there are 4 things (possibly more) that humans should have to pass a test on before being allowed to do; buying a pet, incorporating a private company, making a baby & getting married. The fact that people need so much warning and fine print before signing a mortgage or entering a mobile phone contract, but nothing at all before baby making strikes me as supremely ironic given the gravity and irreversibility of the latter. Another mentor of mine described serious relationships and baby making to me as follows and I see his point; “Blox, it’s like hell. Really easy to get in, impossible to get out.” This state of current affairs also suggests that anyone who wants a bullet proof career of super high earnings, guaranteed longevity and endless streams of work should simply practice family law.

To discuss your balance sheet and streamline your financial life, call Chris at Solve on 0414 985 724 or email chris@solveaccounting.com.au


You can tell a lot about a person from their super

The Australian super system is a bit of a double-edged sword for all of us. Specifically, retail super funds make the member admin passive, but trading active, while self-managed super funds do the opposite. So, unless a member enjoys administration, there is no obvious path to low turnover / buy and hold superannuation. But this situation may not be a bad thing. Allow me to explain….

Retail – admin passive

When someone joins a plain vanilla balanced investment option in one of the big retail funds, which pretty much everyone does at some point in time, they don’t have to do much at all. It’s a similar process to opening a bank account. Just fill in the forms on some website, get your ID verified and sit back and wait for the paperwork to start rolling in. Quarterly statements, monthly newsletters, annual tax summaries – these are all prepared for the retail member without that person ever having to do anything at all. As far as the retail member knows, their balance is being diligently and carefully managed by a highly qualified (but costless) professional investment team every member of which is scrupulously focused with lazer like precision on minimizing costs, and maximising returns. They agonize over every decision, toiling after hours with the clients best interests always at very front of heart & mind! At least, that’s the necessary illusion.

Retail – trading active

Behind the curtain, the reality is less inspiring. Office towers full of well-paid employees endlessly shuffle paper to justify their jobs. Compliance alone is a massive cost for big funds. These are tasks which subtract significant value from the clients’ portfolio but are required by massive amounts of law & regulation. Actual investment managers who work for the retail funds furiously trade various shares, bonds and other alternatives in a highly pressurized but ultimately futile attempt to outperform whatever market they profess specialised expertise in. This clan then trumpet their purported “superiority” in various ways – mainly via the marketing machine which is the primary megaphone used to amplify the good and minimise the bad. Those glossy full-page ads & middle of the cricket TV commercials all have to be thought up and produced usually by expensive spin agencies. The unwitting member pays (dearly) for this corporate bureaucracy that grinds along like an iceberg shaping the landscape.

Self-managed – admin active

The above retail super situation can be starkly contrasted with the self-managed super realm. Opening a SMSF is kinda tricky. Which structure for the trustee? Which bank for the cash management platform? Which broker for the shares account? How do I roll my existing super balance into my SMSF? Will the ATO even let me open a SMSF? These are just a few of the questions which have to be grappled with. On top of that, most self managed members will need to appoint an accountant to assist with both the setup and the ongoing administration of the fund. Then, every year, the member will need to provide data to said accountant and/or upload information to a client portal sufficient to discharge all the duties that are hidden from view in the retail sphere. Suffice to say, the actual administration of a SMSF forces the members to actively engage with the compliance workload even if they refuse to invest the cash itself.

Self-managed – trading passive

Putting all the setup stuff to one side, the newly minted SMSF trustee member must then make the biggest decision of all; how do I invest this cash I now directly control and am responsible for? Without a firm grasp of the investment basics and the income tax laws that apply to both superfunds and ASX listed companies, its practically impossible to proceed with confidence here. It’s usually a process of trial and error which involves sliding down the scale from active trading in the early days/years, to buy and hold as youth gives way to wisdom.

The fact is that most people lack the practical logic, equanimity & patience which is required to invest successfully over the long term. Much of the time, people start out investing  their own super thinking that they can trade their way to riches playing musical chairs with other like-minded players. Those with high investment IQ may be smart enough to pick a workable strategy and stick to it. There are also certain “God level” people who recognize their limitations here and simply buy and hold the market via low cost, broad based index funds. These people tend to focus on the vastly reduced costs of self management and also often simply track a market or 2, periodically buying more and fully reinvesting all distributions. While this is arguably the end game, we must also recognize that no one can rightly lay claim to the ultimate truth and we must proceed with an open mind, always willing to learn and adapt/adjust. Wherever an individual lies on the spectrum, the fact is that self management tends to reduce portfolio turnover over time simply because individuals lack the energy to make 20+ decisions per week or month or year.

Conclusion / Observation

The Australian super system has options for everyone, and, the people who are most truthful with themselves about their own investment strengths and weaknesses will perform best. Self-deception is a bad thing which is what makes our system a good thing. It forces people to confront themselves and make a choice thereby cleansing the population of financial self-deception (to some extent). Specifically, telling yourself that you have what it takes to run a SMSF when you don’t is just as bad as staying in retail super when you do. Figuring out who you are is the key.

To discover yourself, Call Chris at Solve on 0414 985 724 or email chris@solveaccounting.com.au


I wonder... do retail super fund members ever ask, "where does this cash actually come from?"

So, another day, another retail superfund disaster for its members.

This time, one of Australia’s biggest retail superfunds, Colonial First State (“CFS”), has settled a class action filed by Maurice Blackburn Lawyers on behalf of around 100,000 CFS members. While admitting no wrongdoing, CFS agreed to pay $56.3M (about $563 each) to the aggrieved members. The basis of the action was that CFS failed to implement a switch out of high fee accounts with low investment returns quick enough. This affected some members who were left paying trailing commissions to originating financial planners for no service, possibly due to historical CFS dealings which prioritised the sales force (planners) rather than the members.

Now, this blatant breach of ethics is nothing new in retail super – if you recall, there was a recent Royal Commission on the quagmire. Also, the structure of the industry pretty much guarantees that this type of malfeasance will continue indefinitely. But, there are several important points to note here:

  1. It is highly unlikely the members who were ripped off will see anywhere near $563 each (in aggregate) after the lawyer fees & other costs are extracted from the pool.
  2. CFS would have consumed significant internal resources and possibly paid big legal fees to external firms and/or barristers, to respond to, defend and ultimately settle this action.
  3. The CFS members who were not part of this class action have effectively cross subsidised CFS’ defence against it so, even if some affected members “win”, the members of CFS in aggregate clearly lose.
  4. The only winners out of this mess are the lawyers.
  5. Where does the cash to pay the $56.3M settlement amount actually come from?

That last point is worth re-reading & reflecting upon. Can CFS use other member balances or raise fees thereon to pay the settlement amount? If CFS is insured against this risk, what will be the hike in premiums going forward on that policy to continue to provide protection and will long suffering members have to fork out those increased premiums and if so, for how long? Or is there some “contingency reserve” sitting on the balance sheet of either the CFS “master trust” or whatever management company was responsible for this debacle?

Regardless of the answers to these important questions, the point is this; to exit this swamp, ALL CFS members should consider establishing a low cost self-managed superfund.

Call Chris at Solve on 0414 985 724 or email chris@solveaccounting.com.au to discuss your options.

NOTE: the above is NOT personal financial advice. Solve is NOT a financial planner is not holding itself out to be one. Solve Accounting is a low cost, fixed fee for service SMSF administrator which operates wholly within the rules outlined in ASIC info sheet 216.


Understanding super is becoming more important

Reflecting on the 22 Federal budget as a tax accountant in public practice with a growing self managed super fund client base, something really struck me more so than it has done in the past. The thing that struck me was this: As time goes on, if you are an Australian tax resident and you don’t understand how Super can be used to benefit you and the various individual members of your family group, you will (likely) be placed at a material financial disadvantage versus people and family groups who get it.

To go back to the very start of superannuation, it was set up primarily as a tax privileged retirement savings system. What we’re seeing with this constant tweaking and fiddling of the super rules is that superannuation is becoming a vehicle which the federal government is using to achieve various policy and equity objectives – some of which have nothing to do with retirement savings.

Housing, women & ageing are 3 areas where actual or proposed super rules are targeted to achieve specific non-retirement goals. True, it could be argued that the purchase of your first house (for example) is a key step toward securing a person’s retirement. However it’s highly unlikely that the first home a person buys will be the residence they live out their retirement years in. This is just one example of where the $50K first home super saver scheme can be used by a smart family group to give their kids a leg up into their first investment property. It’s highly likely that wealthier, better advised and more investment aware families will use this to their advantage.

Another obvious one which has recently been changed to be even more concessional, is the downsizer contribution. Again, generally wealthier families can use this to stuff another $600k into their Christmas stocking regardless of the other limits and thresholds which may apply to their super balances. Again, there are policy arguments in support of this position; getting oldies/”empty nesters” out of bigger family homes frees up supply of larger houses in urban centres and cities for younger growing families.

Regardless of the merits of that underlying policy, combining the first home super scheme and the downsizer contribution in the same family group, we can see how well informed and financially savvy family groups can significantly increase their tax efficiency with an understanding of the super basics and a wolf pack mentality to investment. This intergenerational mentality is very rare but is becoming more and more important as time and super rule complexity grows.

Key to exploiting super is understanding it. Key to understanding it, is engaging with a superannuation accountant who takes a step back and seeks to understand the broader view of your family group and how the various members of the family can benefit from the complex rules at play.

Call Chris at Solve on 0414 985 724 or email chris@solveaccounting.com.au to discuss your super and family group situation.


Schemes to avoid tax - a fool's errand

Much has been made recently of the ATO’s confirmation of its 2014 fact sheet position in relation to 100A. To summarise the situation for non-tax people, you can’t use discretionary trusts to stream income to tax privileged family members like university aged non-working adult children unless use & enjoyment of the cash follows the income. There are (as always) some narrow exceptions, but on the whole, streaming for tax minimisation only is now officially dead in the water.

But, why such backlash from the tax accounting community here?

Part of the answer is that it’s such a widespread and generally accepted accounting fiction, namely that family trusts could be used to distribute income to one beneficiary while the cash goes to another. Secondly, some tax practitioners may have been doing this for so long that it’s a shock to them to now discover that they may have been involved in avoidance or even evasion activity. A third reason is baked in client expectation; one client does it and talks to another and before long, if you’re the accountant who is NOT facilitating that scheme, then, you’re the guy left without any clients or at least a less profitable practice than you may otherwise have had.

Whatever the reason, “cash over there and income over here” has been comprehensively rebuked by this latest round of consultations & those who fail to heed the warning going forward have exposed themselves to clear and present audit risk.

It should also be said that, while the ATO is holding strong on their assertion that any tax driven streaming as from 1.7.14 is offensive and also NOT retrospective based on their position in the July 14 fact sheet, they have also clearly articulated that they will NOT be dedicating audit resources to hunting down historical infringements which are not already under review.

Reading between the administrative lines, where a taxpayer corrects future behaviour, the ATO will (likely) continue to let the flea infested dog sleep. If you read the 2014 fact sheet, it’s pretty hard to disagree with that position. Sure the ATO could have made more noise and forced their view down the throat of the tax community back in 2014 with more vigour. However the general premise of their position, that you must return your income, can’t be disputed. 6-5 & 6-10 make it clear that income derived by you must be declared by you.

Some accountants may argue that the trustee derived the income not the beneficiary, however trustees very rarely derive and are assessed on income. Div 7A was also covered off in that same fact sheet and has been again reaffirmed (more thoroughly) in the February 22 document package.

In short, this appears to be a clash of what’s practical vs what’s technical. Tax law is hard, but taking the ostrich approach to practice is never a good idea. Schemes to avoid or reduce tax are a fool’s game. Any element of artificiality to shift and/or reduce the tax burden of an individual or family group will ultimately be struck down one way or another.

To discuss your circumstance, call Chris at Solve on 0414 985 724 or email chris@solveaccounting.com.au


Land; a complex investment

 

Having been in the public practice of income tax compliance for close to 20 years, I am not so sure about this pithy chunk of logic. It belies deep complexity.

From my perspective, land is a tricky thing to invest in. This is particularly true in Australia because:

  1. The price of land in any major city or centre is very high.
  2. Land is the only asset which is taxed at every level of government.
  3. Transaction costs are very high.
  4. Holding costs are very high.
  5. Tax settings distort the entire market.
  6. Policy settings which favour land stifle innovation.

This is a highly summarised list of the fraught nature of property investment in Australia. Yet pretty much everyone has to play this game to some extent.

Despite the complexities, there are a few simple truths that apply to land investment in Australia. What can be said for sure is that a strong understanding of the local, State & Federal tax laws that apply to any particular interest in land is a massive benefit in building a tax efficient property portfolio, even if that portfolio consists of a single property. It is also true that in Australia, the single most important investment most families will ever make is in their main residence. The house you live in is a politically protected asset class and it is by far the most important non-productive asset an Australian resident taxpayer or citizen can hold.

To plan for a smart land purchase, whether it be your first or subsequent, it is important to seek the advice of a tax accountant who is also an experienced land investor.

Call Chris at Solve on 0414 985 724 or email chris@solveaccounting.com.au to discuss your plans.


Apathy in the super system

So, this week it was revealed that South Australian workers have been underpaid an estimated $283M in super in the 2019FY: Nestegg, 18.1.22, Jon Bragg, “Unpaid super deals a $283m blow to SA workers.”

Last week, it was QLD workers who had been ripped off to the tune of $940M in super in the 2019FY: Accountants Daily, Emma Ryan 12.1.22, “ATO urged to address ‘Super rip-off’ impacting Qld workers.”

Earlier this week, the credit Union Building Societies (CUBS) Superfund became the latest big retail fund to announce that it would wind up in March of 22. This announcement was triggered by the introduction of some very basic, low bar performance hurdles by APRA which kicked in as from 1.7.21.

Why all the carnage in the Australian superannuation system? Why does the industry seem to lurch from one disaster to the next on a seemingly constant ‘hamster wheel’ like cycle?

One answer is apathy; a lack of interest, concern or energy.

Specifically in the retail superannuation context, an employer makes (or forgets to make) quarterly super payments to an employee’s choice of fund. The employee never sees the cash – it is jettisoned off into some Orwellian memory hole and never re-materialises in a meaningful way. The employee lacks the skills or the time (or both) to actually understand if the correct amount of super was ever paid in, let alone to assess how the cash paid in is performing in the selected investment option. Corruption breeds in this dark pit and is periodically dragged out into the light of day – sometimes by a regulator, occasionally via Royal Commission. It will continue.

Is there a way to stop this from occurring?

From an economy wide perspective, apathy will continue to pervade retail super. On a member-by-member basis however, the good news is, self-managed superfunds automatically combat apathy in the retirement savings space – but only for members who actively choose this path. Specifically, SMSF trustees are forced to be involved with their super from the point of payment in from the employer right the way through to assessment of investment returns. This is because the cash paid in actually hits a cash bank account which the SMSF member trustee must then invest. By forcing a member to take active personal responsibility for their own retirement outcomes, a SMSF is the perfect vehicle to rectify much of what is terribly wrong with the current superannuation system in Australia. The key with a SMSF is for the member to locate and engage with a SMSF professional who is compatible with them and operates on a low cost, fee for service, client focused set of beliefs – that’s where Solve comes in.

Reach out to Chris Bloxham at Solve on 0414 985 724 or email chris@solveaccounting.com.au to discuss your super anytime.


Economic contribution does NOT include income tax payments

Wesfarmers released their annual “tax contribution report” today (16.12.21). It’s a useful read for a bloke like me – but most people will be able to carry on with their lives quite comfortably without any knowledge of its existence. Apparently, this is their 6th such report although this is the first one I’ve ever heard of – I’m a bit behind on my reading.

There is one point I want to highlight for the everyday reader here – and possibly also for some tax technical people too.

The below graphic is a big picture, heavily rounded summary of some key report numbers:

I’ve highlighted in yellow and underlined in red the number I want to hone in on – the Australian income tax expense. My point here?; the economic contribution of an Australian corporate tax entity (like Wesfarmers) should NOT include Australian income tax payments.

Why? Simple; the imputation system.

Imputation requires by law that every cent of income tax paid by Wesfarmers and all other companies listed on the ASX, and even every private company, is credited against the income tax liability of someone else. That “someone else” is the shareholders of the company. These shareholders may be humans, superfunds or even other companies. They may be residents or non-residents. The point is that the income tax paid by the Australian company is in one way or another a “tax shield” for the shareholders on an ozzy-dollar for ozzy-dollar basis.

Accordingly, at a minimum, this should be explained in a detailed footnote in all “contribution” reports or preferably get its own paragraph explaining the net zero effect of Australian corporate income tax payments. To leave this key detail off along with a detailed reconciliation of the franking account is a deplorable oversight at the very least – but more likely a blatant deception.

To understand how imputation can work for you and your family group, call Chris at Solve on 0414 985 724 or email chris@solveaccounting.com.au


Why & How Haystacking Works

The Australian investment universe is pretty small. For most investors who lack the time or expertise to pick needles in this (relatively small) haystack, the better approach may be just to buy the whole thing.

A good illustration of why this works is currently playing out in real time on the ASX. Bunnings is trying to buy Priceline – but Woolworths has lobbed in an offer to buy it too.

Why?

So, if you own Woolworths shares only, or Bunnings shares only, i.e. if you’ve picked a needle, then, you might be following this deal closely and actually care about the outcome. But if you own both, it’s a moot point and you can carry on with your day unaffected.

For a second haystacking principle illustration at play in this deal. This one has to do with the institutional service providers to the deal belligerents. It’s safe to assume that the bank i.e. CBA, NAB, ANZ or WBC, which is really just one single business with 4 different fail safe divisions, will be either financing this deal somehow or providing profitable ongoing retail banking services to all 3 of Bunnings, Priceline & Woolworths. Again, if you hold shares in only one of the divisions, then you may actually care about the outcome. But if you own all, it’s a moot point and you can carry on with your day unaffected; and that’s the “why” – haystackers can take a more relaxed approach, confident that they will capture whatever value is (hopefully) created regardless of what individual participants do and regardless of the outcome.

How?

Quickest, and importantly the cheapest and most efficient, way to achieve the haystack is to buy VAS. Perhaps a better way to achieve global haystack for an Australian tax resident is 50/50 VAS/VGS. A focused ozzy haystack might include bank, supermarket and VAS.

This deal, and the principles of haystacking discussed above, can be summarised in the below graphic:

To discuss any aspect of the above including how haystacking can be applied in a tax efficient way for your family group, call Chris at Solve on 0414 985 724 or email chris@solveaccounting.com.au


Retail Super: A Quagmire of Deceit

The “lazy tax” paid by apathetic ozzies who leave their superannuation dollars in retail fund accounts was again highlighted this week by 3 separate highly publicised matters.

Firstly, the class action filed against QSuper in the Federal Court by Shine lawyers on behalf of 140,000 of its own members who had been deceived into paying higher life insurance premiums by their own trustee. The next egregious deceit perpetrated on the poor old QSuper members, most of whom are teachers and health care workers in Queensland, is the fallout from the franking credit stripping scheme.

The ATO may be imposing a record penalty on QSuper in relation to this malfeasance by the people running QSuper – however its the members who will be footing the bill for any interest or penalties ultimately imposed – & from the sounds of it, there’s gunna be heaps! What a lot of retail members do not know or understand is that much of the supposed “performance” of big superfunds is delivered by franking credit arbitrage & has absolutely nothing to do with achieving superior returns. People inside retail super are all too aware of this rouse – yet another deceit to add to the long & growing list.

And if these first 2 humdingers weren’t impressive enough…

Perhaps most on the nose is the various applications to sundry courts around the country to allow retail superfunds to amend their constituent deeds allowing the funds to charge unsuspecting members a new class of fees to build “TFCR” buffers. Trustee Financial Contingency Reserves are essentially legalised theft from current members to protect degenerate fund managers inside the superfund against the worst of their own proclivities – the minister for superannuation, Jane Hume, said it best:

“Let’s not kid ourselves as to what this really is; taking member’s money out of their retirement savings to set up a pool of funds – owned by the trustee – to ensure they can pay for penalties due to their own misconduct”: nestegg, 23.11.21.

The entire retail super industry exists on inertia & apathy. These 2 ingredients when mixed together with a healthy sprinkling of deceit create the ideal conditions for unbridled immorality.

If you are wanting to exit the swamp, call Chris at Solve on 0414 985 724 or email chris@solveaccounting.com.au to discuss your options.