financial services managed investments seminar

FINANCIAL SERVICES

Managed Investments SeminarMay 2007

2© 2007 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All

rights reserved.KPMG and the KPMG logo are registered trademarks of KPMG International.

Liability limited by a scheme approved under Professional Standards Legislation.

Managed Investments Seminar

• Introduction – Tony Mulveney, Partner

•Tax Update – Saminda Fernando, Senior Manager

•Superannuation – Wayne Hirt, Partner

•Unit Pricing – Martin Paino, Senior Manager

•Financial Reporting & IFRS – David Kells, Partner




Key tax developments

Saminda Fernando




Key tax developments

•CGT and foreign residents

•Withholding tax - Tax Laws Amendment (2007 Measures No. 3) Bill 2007

Distributions to non-residents from managed investment trusts

Distributions to non-resident trustee beneficiaries




CGT and foreign residents

• Implications for non-resident investors:

Disposal of interests in managed funds

Capital gains through fixed trusts




CGT and foreign residents

• Disposal of interests in managed funds

Non-portfolio interest test

Less than 10% at disposal or throughout a 12-month period in the 2 years before disposal

Principal asset test

More than 50% of the entity’s assets are TARP

Tracing through chains of entities

• Capital gains through fixed trusts




Distributions to non-residents from managed investment trusts

•Flat 30% non-final tax regardless of identity of non-resident (from 1 July following Royal Assent)

•Managed investment trust

Relevant connection with Australia

MIS

Listed or widely held




Distributions to non-residents from managed investment trusts (cont)

•Fund payment

Estimation of net income adjusted for excluded amounts and deductions

Excluded amounts (interest, dividend, royalties, non-TAP capital gains and foreign income)

Reasonable estimations required based on trustee’s knowledge at the time of making the payment

Timing




Distributions to non-residents from managed investment trusts (cont)

•Trustee required to withhold on Fund Payment

•Remittance

•No withholding for payments to Intermediaries

Notices




Distributions to non-resident trustees

• Distributions to non-resident trusts assessable to resident trustee

• Tax rate is the non-resident individual top marginal tax rate (currently 45%)

• Non-final tax

• Generally effective 1 July 2006

• Carve outs:

Australian managed investment trusts

Trustee intermediaries (managed investment trust income only)




2007 Federal Budget Announcements




2007 Federal Budget Announcements

•SBT ceiling to be removed

Effective 1 July 2005

•Restructuring stapled entities

Effective from 2006-07 year

•Venture capital - further concessions




Presenter’s contact details

Saminda Fernando

Senior Manager

02 9335 8809

[email protected]

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.




Superannuation

Wayne Hirt




Superannuation – Is it really Simplified?

•Topics

‘Simplification’ overview

Implications

Administration systems

Pensions

TFNs

Contributions

Taxation on death benefits

Superannuation Guarantee (SG) / Ordinary Time Earnings (OTE)

Anti Money Laundering (AML) / Counter Terrorism Financing (CTF)




Everything is rosy – Overview of key changes




Budget overview

• Changes to the tax arrangements for superannuation termination payments

• Reasonable Benefit Limits (RBLs) will be abolished

• Tax on benefit payments

Lump sum

Pension

Death

• Removal of the current age-based deductible contribution limits

• New pension structure




But danger lurks beneath (Implications)




Administration systems implications

• Administrative issues

Update of fund documentation (Trust Deed, PDS, etc)

Contributions reporting – Surcharge reincarnate

Treatment of excess contributions

Refund of contributions

- No TFNs

- Excessive amounts

Crystallisation of pre July ’83 components

• External software providers

• System upgrade




Pensions implications

•Allocated pensions

•Morphing / Commutation to new pension

Trigger events

•New superannuation minimums

•Transition to retirement pensions




Allocated pension minimums compared to new superannuation pension minimums

0

20000

40000

60000

80000

100000

120000

20 30 40 50 60 70 80 90 100

Age

Acc

ou

nt

Bal

ance

Allocated Pension Super Pension




TFN implications

• TFN collection and taxation consequences (penalty tax)

• Rejection of undeducted monies

• Risk only products

• TFN quoted post payment

• Quotation of TFNs by employers

• What are you ding to collect TFN’s?




Contribution implications

• Contribution limits

Concessional

Non concessional

• Monitoring of contributions against limits

Who is responsible…

- Member?

- Fund?

- Employer?

• Reporting requirements

• Salary packaging

• DB funds

• Early / Late balancers




Death Benefit implications

•Payment to a dependant

•Payment to a non-dependant

•Payment to an estate




Just when you thought it was safe to go back into the water!

•AML / CTF

•Superannuation Guarantee / OTE




Conclusion

• Is it really Simpler?

•Have you identified the system / process enhancements required?

•Resourcing – I.T. and Human




Appendices




Tax rates for lump sums paid by superannuation funds

Age Current treatment New treatment

Under 55 Pre-83

Post-83

5% assessable at MTR

20%

Nil

20%

55 to 59 Pre-83

Post-83

5% assessable at MTR

Nil on 1st $135,590; balance at 15%

Nil

Nil on 1st $140,000; balance at 15%

60+ As per 55 to 59 above Nil

Excess above RBLs

Pre-83

Post-83

45%

38%

Nil

Nil




Tax rates for pensions paid by superannuation funds

Age Current treatment (assuming the individual has not exceeded their relevant RBL)

New treatment

55 to 59 Deductible or tax exempt amount

Balance

Nil

MTR less 15% rebate

Nil

MTR less 15% rebate

60+ As for age 55 to 59 Nil





Wayne Hirt

Partner

02 9335 7871

[email protected]





Unit Pricing

Martin Paino




Agenda

•Unit Pricing Attribution (A new development)

What is it?

What are the benefits (for unit pricing controls and processes)?

Practical Issues to be aware of.

•APRA’s Risk Management Standards for Life Insurers




Actuarial Attribution of Unit Prices




What is Actuarial Unit Pricing Attribution?

• It is a more advanced form of the standard “unit price benchmarking” control that:

compares the movement in unit price against the movement in a benchmark (e.g. ASX 200 Index)

• Who is doing it? We know of 2 large fund managers

• Why are they doing it?

Better understand why unit price moves differently to assets

To help with communicating with investors (esp. external options)

Identify problems that can not be detected under standard approach

Identify small errors that accumulate over time

• The market is heading in this direction (i.e. more robust controls)




What Factors impact a Unit Price?

Unit Price @ t(Australia Equities)

Unit Price @ t+1(Australia Equities)

Asset Growth

Tax

Fees

Back Dating

Transaction Spreads

Liability EffectsDelays in investing Money




Standard Benchmarking


Unit Price @ t+1(Australia Equities)Asset Growth

Tax

Fees

Back Dating

Transaction Spreads



Benchmark Return net of Tax and Fee

(S&P/ASX 200 Index)

Residual Check within Tolerance




Unit Pricing Attribution


Asset Growth

Tax

Fees

Back Dating

Transaction Spreads



Residual

Residual

Residual

Residual

Residual

ResidualResidual

Expected Tax

Expected Fees

Zero

Zero

SmallSmall

Check within Tolerance

Benchmark Gross of Tax(S&P/ASX 200)

Check within Tolerance




How do you do Unit Pricing Attribution?


Asset Growth

Tax

Fees

Back Dating

Transaction Spreads


1. Attribute Investment Return into 7 categories on the left (minimum).

(Using the unit pricing formula and attribution techniques commonly used by actuaries in life insurance and by finance specialists to attribute investment returns)

2. Calculate the expected impact of each category on unit price

(Using knowledge of unit pricing process, products, and unit pricing formula)

3. Compare the difference between 1 and 2 for each category against tolerance level

(Set tolerances based judgement and historical experience of funds)

4. Aggregate daily attribution effects

(Using techniques commonly used to aggregate daily investment attribution effects




Practical Considerations

• Must help resolve issues, not just identify issues

• Lots of data required. Need detailed transaction data (units and cash flows)

• Process must be automated (computations can be significant)

• Should be tested in spreadsheets before being implemented (each fund manager’s solution will be slightly different)

• Must select aggregating technique (no correct approach, each has advantages and disadvantages)

• Frequency of doing aggregation calculation (resources vs benefits)

• Areas to be aware of:

Transaction Spreads

Back dating




Summary

• Unit Pricing attribution in a new tool that is likely to replace the standard benchmarking check used by managers

• Advantages are:

Help identify small errors in unit price

Better understand (short term and long term) performance of fund against benchmark

Help with communicating with investors

Help with improving unit pricing processes

Identify errors that accumulate over time

Help ensure investors are treated equitably




APRA’s Risk Management Standard for Life Insurers




Brief Overview

• Major recent development for Life Insurers. APRA Standard are: LPS 220 Risk Management; and LPS 232 Business Continuity Management

• Applies in full from 1 January 2008

• Standards are similar to those applying to General Insurers and Super Funds (Managed Investment Schemes next??)

• Life Insurers are well placed, but need to pull together documents

• Our experience is that:

Operational Risk (well documented)

Asset liability management (needs some work)

Capital management / Enterprise Capital (over arching philosophy required)

• For more information KPMG Actuaries has a 4 page fact sheet





Martin Paino

Senior Manager

KPMG Actuaries

02 9335 7914

[email protected]


© 2006 KPMG, an Australian partnership, is part of the KPMG International network. KPMG International is a Swiss cooperative. All rights reserved. The KPMG logo and name are trademarks of KPMG.





Financial reporting update

David Kells




Financial reporting update

• AASB 7 Financial Instruments: Disclosures

• AASB 8 Operating segments

• Amendments to existing standards

• Future developments

• KPMG’s Example Managed Investment Scheme




AASB 7 Financial Instruments: Disclosures

•Applicable to financial reporting periods beginning on or after 1 January 2007 with early adoption permitted.

•Replaces the disclosure requirements of AASB 132 Financial Instruments: Presentation and Disclosure





• Key requirements:

Existing AASB 132 requirements plus:

Sensitivity analysis

Concentrations of risk

Quantification of sensitivity to ‘reasonably possible’ variances in credit, liquidity and market risk

Details of impaired or past due assets

Example disclosures provided in Appendix 2 of KPMG’s Example Managed Investment Scheme





•Practical implications

Will impact schemes for periods commencing on or after 1 January 2007 and preparing accounts for period from inception to 30 June 2006

Impacts all financial instruments, including cash, investments, trade payables and receivables, borrowings and derivatives

30 June 2007 comparatives will be required for 2008 accounts

Disclosures may require data which is not currently available from accounting systems




AASB 8 Operating segments

• Applicable for periods beginning on or after 1 January 2009 with early adoption permitted

• Requires segment reporting based on segments monitored by the chief operating decision maker

• AASB 8 only applies to individual and consolidated financial statements of entities whose debt or equity instruments are traded in a public market or are in the process of issuing any class of instruments in public markets

• If not meeting the criteria above, adoption of AASB 8 will result in removal of the segment note but…...

• “Public market” is not defined and interpretation may change (especially due to AASB’s SME project)




Amendments to existing standards

• AASB 101 Presentation of Financial Statements

Applicable for years beginning on or after 1 January 2007

Amended to remove some (but not all) Australian specific additional disclosure

Replaces Australian specific guidance with IASB implementation guidance

Retention of some Australian specific amendments applying to for-profit entities, including statement re compliance with Australian Accounting Standards, auditor remuneration and franking account disclosures

If not early adopted, need to include a statement in 30 June 2007 financials re potential impacts

Minimal impact for schemes




Amendments to existing standards

• AASB 2007-4 Amendments to Australian Accounting Standards arising from ED 151 and Other Amendments

Applies to periods commencing on or after 1 July 2007 with early adoption allowed.

Principally driven by changes in consolidation requirements for reporting entities

Reinstates optional treatments allowed under IFRS but previously excluded from AIFRS, including allowing cash flow statements to be prepared using either the direct or indirect method.

Removes some minor Australian specific disclosures.

Must justify why a new accounting policy is more appropriate

Need to include a statement re potential impacts if not early adopted

Minimal impact for schemes - disclosure only




Future developments

• IASB has committed to no new standards to apply before 1 January 2009 with following exceptions:

AASB 7

IASB annual improvements program

IFRIC will continue to issue interpretations

AASB removal of some further Australian specific items from AIFRS




Future developments

• Convergence with US GAAP is gathering momentum

• Accounting for superannuation funds (AASB project)

AASB released project summary in July 2006

An issues paper and draft consultation paper is expected in Q2 2007. Main implications

consolidation requirements for parent entity super funds

Application of AASB 119 Employee Benefits to super fund defined benefit obligations

An exposure draft is expected in Q3 2007




Future developments

•Classification of financial instruments puttable at fair value

Final standard is expected in Q3 2007 (likely to apply from 1 January 2009)

Exposure draft issued in June 2006 proposed: (a) financial instruments puttable at fair value; and (b) instruments that impose an obligation to deliver a pro-rata share of the net assets of an entity upon its liquidation

to be classified as equity, subject to meeting certain criteria





Name David Kells

Position Partner

Phone 02 9455 9602

Email [email protected]


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