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.
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.
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.