Nick Bruining Q+A: It’s not just the stock market, there’s a few reasons your super fund is hurting right now

Question

My low-cost superannuation fund is invested in the balanced option and it has performed quite well over the past year or so.

My fiancee also has a balanced super fund, but not in a low-cost scheme. Her returns are a bit higher than mine over the same period of time.

I have been telling her that she would be better off paying less fees, but the returns on both funds tell a different story. Can you tell me why?

Answer

While you are each invested in a balanced option, no two balanced funds are ever the same.

While investment fees will have some bearing on the net returns, these days the difference in fees between funds is typically 0.5 per cent a year, or less.

By far the greatest determinant is the asset allocation between different asset classes and the actual investments chosen. The allocation of the money between shares, property and government and corporate fixed interest investments is the single biggest determinant of a super fund’s investment returns.

One fund might have a higher allocation to shares, and if the share market has done well in recent months, the fund’s returns can be spectacular. Of course, a crash in the market would have the reverse effect.

Many low-cost funds also rely quite heavily on the performance of assets which are not listed on the stock or other exchanges, sometimes making them difficult to value. In recent months superannuation fund regulator the Australian Prudential Regulation Authority has made it very clear there is a high level of concern about the unlisted asset valuations used by some funds.

This applies to real estate valuations and infrastructure assets such as toll roads, pipelines and similar assets.

For example, you might apply a “friendly” valuation of $50 million on an office tower where in fact, if sold, the sale price would be much less.

Some funds have, therefore, been revaluing their unlisted assets, and this has been reflected in the investment returns.

For that reason, it is worthwhile understanding the underlying mix of your fund and, if appropriate, change the asset allocation, perhaps dialling up your own “mix” of asset types. You can generally do both at no cost on your super fund’s website.

Question

I have owned some investment properties over the past few years and have been claiming all of the tax-deductible expenses suggested by my tax adviser. This includes an annual amount for depreciation.

With the strength of the property market recently, I decided to sell most of these properties.

My estate agent told me about a special tax charge that might apply when I sell the properties, linked to the depreciation.

Can you shed any light on this “tax charge”.

Answer

The real estate agent is possibly referring to an adjustment that is effectively made to the capital gains tax calculations when the property is sold.

In very simple terms, if the depreciated assets realise an amount that is higher than the written-down value of the asset, then that profit effectively becomes part of your tax-assessable income.

Because it is so difficult to identify and calculate the tax for individual items, a simplified system is applied. Typically, it is reflected as an adjustment to the overall cost base of the asset(s). In some cases, the adjustment can be considerable, and this could add to the net CGT profit and the amount of tax payable.

A simplified example is where, over a period you owned it, you claimed depreciation expenses of $25,000. When the property is sold, the cost base used to determine profit will be the total acquisition price, plus the cost of the property sale, plus the cost of property improvements, less capital works deductions and the total amount of $25,000 claimed in depreciation.

In effect, it boosts the gross profit by $25,000. Because you held the property for more than 12 months, only 50 per cent of the profit will be added to your other assessable income.

Nick Bruining is an independent financial adviser and a member of the Certified Independent Financial Advisers Association