Share the benefits

The competition for superannuation members is heating up, as industry funds allow members to buy and sell shares from an expanded menu and make the most of the tax benefits enjoyed by people with self-managed funds.

In the past, investors who wanted to put some of their retirement savings into shares had to start a self-managed super fund and invest in a retail fund run by one of the big financial institutions, or buy shares outside super and miss out on the tax advantages offered by super (see box, below).

Members of industry super funds are generally restricted to pre-mixed investment options. AustralianSuper, CareSuper and Legalsuper offer members the ability to pick their own stocks from the top 200 listed companies. But from July, AustralianSuper is extending the choice to the top 300 stocks and CareSuper will follow suit from October.

AustralianSuper will also offer exchange-traded funds (ETFs) and term deposits. Members will have access to live trading (at present, buy-and-sell orders are executed once a week, which is a disincentive for people who want control over the price they accept).

TRADING RESTRICTIONS

The chief executive of CareSuper, Julie Lander, says members will also be able to participate in more corporate actions such as share buybacks and rights issues.

Lander says the changes will give members the flexibility and tax advantages enjoyed by share investors outside super, or those with their own super fund, at a low cost.

Individual trading accounts will give members the ability to manage franking credits and allow them to offset capital losses from the sale of their shares against capital gains in the same or subsequent years.

Industry funds do put some restrictions on direct shares, though.

To pick your own stocks you must have more than $10,000 in your account, invest at least $1500 in each stock and have no more than 50 per cent of your account balance in shares. Even with live trading, members will not be able to buy and sell one stock on the same day.

"Super is about maximising retirement outcomes we don't want to encourage 'short-termism'," the product manager investments for AustralianSuper, Paul Souter, says.

At present, industry funds only offer direct shares to members in the pre-retirement accumulation phase but AustralianSuper and CareSuper plan to extend their share offering to pension-fund members within the next year to bring them into line with super wraps and self-managed funds.

WHAT IT COSTS

The chief operating officer of SuperRatings, Nathan MacPhee, says administration fees and brokerage are generally lower at industry funds but some super wraps are competitively priced, with better execution of trades and a broader investment menu, although you need to factor in platform fees and adviser fees (if you use one).

For example, the independent wrap provider, Netwealth, offers a choice of all ASX-listed shares, ETFs, warrants and other investments. Brokerage is a flat $20 a trade, which is slightly dearer than the $12.50 charged by industry funds for investments of up to $4167 (a sliding scale applies to larger amounts) but comparable to the lowest rates offered by online brokers.

"The difference between what we do and industry funds is that we leave it up to the client what they want to invest in and where," the managing director of Netwealth, Michael Heine, says.

BT SuperWrap offers about 700 stocks, ETFs and debt securities. Its national manager of BT Wrap platforms, marketing and communications, Nick Bowley, says clients can hold securities in their name and manage their own investments, or leave the paperwork and end-of-year tax reporting to the wrap provider.

They can also choose their own broker, or use the wrap's default online broker at a charge of $39 or 0.1 per cent of the trade value, whichever is higher.

Bowley says the company's product has evolved over 10 years "to quite a sophisticated level with all the flexibility and tools required to manage portfolios".

Tax advantages of holding shares inside super

The main advantage of holding shares inside your super fund rather than outside is the lower tax rates that apply.

Capital gains on shares sold inside super are taxed at a maximum rate of 15 per cent if you hold them for fewer than 12 months or 10 per cent if you hold them for longer.

By comparison, capital gains on shares sold outside super are taxed at your marginal rate, with a 50 per cent discount if you hold them for more than 12 months. So, someone on the top tax rate of 46.5 per cent (including Medicare) pays an effective rate of 23.25 per cent while someone on the 31.5 per cent rate pays 15.75 per cent.

If you are in pension phase you pay no capital gains tax on shares sold inside super.

Dividend income is also taxed at your marginal rate outside super compared with tax of just 15 per cent inside super.

You can end up paying even less if the dividends come with franking credits attached.

For example, if a company pays a fully franked dividend of $70 with a franking credit of $30, a super fund member would receive an after-tax dividend of $85.

If you held the same shares outside super you would pocket $53.50 if you were on the top tax rate and $68.50 if you were on the 31.5 per cent rate.

Key Points

- Industry super funds are improving their investment menu to hold on to members who might be tempted to set up their own self-managed fund.

- Members of some industry funds will soon be able to pick stocks from the top 300 listed Australian companies.

- Some super wrap accounts offer competitively priced share trading and more choice than industry funds.

- You pay less tax on shares held inside a super fund.