KPMG last month told superannuation funds that they should re-assess caps for their deferred tax assets, as the market slump and ongoing volatility had increased the risk that unit prices may overvalue those assets.
KPMG told members of the Fund Executives Association Limited (FEAL) that tax in unit pricing was not “business as usual” in this environment, and it was not safe to assume that previous years’ data would hold for this year’s unit pricing tax estimates. The significant realised and unrealised losses of the past year would have a flow-on affect for unit pricing in terms of growing deferred tax assets.
Bernard Finnegan, KPMG tax director, said that accounting for large deferred tax assets in unit prices in such volatile markets creates a risk that inequities may arise, because the realisable value of deferred tax assets is uncertain. Members exiting the fund could receive too much value for the deferred tax asset, while continuing and new members may not ever realise that value in the future.
Finnegan suggested one method for capping the deferred tax assets was to use trigger points at the unit series level; when the deferred tax asset as a proportion of net asset value reaches a pre-determined level, the realisable amount of the asset is re-assessed. At a time when there is a lot of movement in and out of investment options, members risked paying unit prices that include inappropriately calculated tax amounts.
Super funds could be exposing themselves to regulator action as well as financial and reputational costs, and Finnegan suggested that funds should review their unit pricing tax positions. In regards to asset valuations, Matt Githens, associate director of risk advisory services at KPMG, cautioned funds that they may need to consider suspending crediting rates or daily unit prices.
He said the market volatility could result in circumstances where reliable valuations could not be obtained within the required time, which could also cause inequity for members. “Regulators are expecting values to be accurate in order to allow members to transact fairly,” he said. “But a number of super funds have a significant exposure to assets that are not valued as frequently as their members are transacting.”
Not only were regulators cracking down on this, but Githens said that funds could also be exposing themselves to arbitrage risk. He pointed to one historic case, in which a corporate super fund was under the impression it had robust daily forward unit pricing. Two employee members of the fund discovered that the valuation in the wholesale international option was trading at value date of T+2, and by switching repeatedly between wholesale international and the cash option, incurred a cost to members of over $1 million.
