Deferred tax assets are stifling competition in the pooled superannuation trust (PST) sector, with at least one corporate fund having its intention to switch implemented consultants frustrated by the prospect of leaving the valuable intangible assets behind.
It is understood the Holden Employees Super Fund, a long term implemented consulting client of Russell Investments, is keen to switch arrangements to Mercer but has been delayed in doing so by an inability to take deferred tax assets with it.
After the massive market falls of 2008/9, most equity-linked unit trusts built up large theoretical reserves of deferred tax assets (DTAs) – that is, losses which had no present worth, but which would become valuable when they were used to offset capital gains tax liabilities in the future.
The DTAs can be reflected in a fund’s unit price to the extent an auditor is comfortable they can be used within a ‘reasonable’ period of time – for most unit trusts, that meant capping the DTA component of the unit price at 2 per cent.
However, while the Government has temporarily allowed DTAs to be retained in successor fund transfers, the relief does not extend to investors switching from one PST to another, unless their departure means that PST will shut down, according to Rice Warner’s Richard Weatherhead.
It is understood that Holden fund members face the prospect of only receiving 98 cents in the dollar if they are switched from Russell’s implemented PST, because the firm is under no obligation to crystallise the 2 per cent DTA component of the unit price.
Allowing a significant client like Holden to take its DTA with it also reduces Russell’s chance of being able to use all of its stockpiled DTAs to offset gains in the future.
Warren Chant, whose Chant West Financial Services has run the implemented consulting tender for the Holden fund as well as another Russell client, the IBM Australia Staff Super Plan, said the boards were working with Russell toward a “commercial outcome” regarding the treatment of DTAs.
Russell was unavailable for comment at presstime. Fund secretary of the Holden Employees Super Fund, Harvey Williams, acknowledged the review of implemented investment arrangements had been delayed by the search for an optimal outcome regarding DTA entitlements, but would not comment further.