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Military Super financial statements

MilitarySuper Independent Auditor's Report

INDEPENDENT AUDITOR’S REPORT

To the Minister for Finance and Members of the Military Superannuation and Benefits Scheme

Opinion

In my opinion, the financial statements of the Military Superannuation and Benefits Scheme for the year ended 30 June 2020 present fairly, in all material respects, the financial position of the Military Superannuation and Benefits Scheme as at 30 June 2020 and its financial performance and cash flows for the year then ended in accordance with Australian Accounting Standards.

The financial statements of the Military Superannuation and Benefits Scheme, which I have audited, comprise the following as at 30 June 2020 and for the year then ended:

  • Statement by the Trustee of the Military Superannuation and Benefits Scheme;
  • Statement of Financial Position;
  • Income Statement;
  • Statement of Changes in Member Benefits;
  • Statement of Changes in Equity;
  • Statement of Cash Flows;
  • Notes to the financial statements, comprising a Summary of Principal Accounting Policies and other explanatory information.

Basis for opinion

I conducted my audit in accordance with the Australian National Audit Office Auditing Standards, which incorporate the Australian Auditing Standards. My responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Statements section of my report. I am independent of the Military Superannuation and Benefits Scheme in accordance with the relevant ethical requirements for financial statement audits conducted by the Auditor-General and his delegates. These include the relevant independence requirements of the Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants (including Independence Standards) (the Code) to the extent that they are not in conflict with the Auditor-General Act 1997. I have also fulfilled my other responsibilities in accordance with the Code. I believe that the audit evidence I have obtained is sufficient and appropriate to provide a basis for my opinion.

Trustee’s responsibility for the financial statements

The Superannuation entity’s trustee is responsible for the preparation and fair presentation of financial statements that comply with Australian Accounting Standards and the form agreed with the Minister for Finance and the requirements of the Superannuation Industry (Supervision) Act 1993 (SIS Act) and the Superannuation Industry (Supervision) Regulations 1994 (SIS Regulations). The trustee is also responsible for such internal control as they determine is necessary to enable the preparation that are free from material misstatement, whether due to fraud or error.

In preparing the financial statements, the trustee is responsible for assessing the ability of the Military Superannuation and Benefits Scheme to continue as a going concern, disclosing, as applicable, matters related to going concern as applicable and using the going concern basis of accounting unless the trustee either intends to liquidate the entity or to cease operations, or have no realistic alternative but to do so.

Auditor’s responsibilities for the audit of the financial statements

My objective is to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes my opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with the Australian National Audit Office Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements.

As part of an audit in accordance with the Australian National Audit Office Auditing Standards, I exercise professional judgement and maintain professional scepticism throughout the audit. I also:

  • identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for my opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control;
  • obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control;
  • evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the trustee;
  • conclude on the appropriateness of the trustee’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the entity’s ability to continue as a going concern. If I conclude that a material uncertainty exists, I am required to draw attention in my auditor’s report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify my opinion. My conclusions are based on the audit evidence obtained up to the date of my auditor’s report. However, future events or conditions may cause the entity to cease to continue as a going concern; and
  • evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation.

I communicate with the trustee regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that I identify during my audit.

Australian National Audit Office

Bola Oyetunji

Senior Executive Director

Delegate of the Auditor-General

Canberra

23 September 2020

Statement by the Trustee of the Military Superannuation and Benefits Scheme ('Scheme')

The Board of Directors hereby states that in its opinion:

(a) the accompanying financial statements of the Military Superannuation and Benefits Scheme are properly drawn up so as to present fairly the financial position of the Scheme as at 30 June 2020 and the financial performance, changes in equity, changes in member benefits and cash flows of the Scheme for the year ended on that date;

(b) at the date of this statement there are reasonable grounds to believe that the Scheme will be able to pay its debts as and when they fall due;

(c) the financial statements are in a form agreed by the Minister for Finance and the Trustee in accordance with subsection 30(1)(d) of the Governance of Australian Government Superannuation Schemes Act 2011 and have been prepared in accordance with Australian Accounting Standards and other mandatory professional reporting requirements;

(d) the financial statements have been prepared based on properly maintained financial records; and

(e) the operations of the Scheme were conducted in accordance with the Governance of Australian Government Superannuation Schemes Act 2011, the Military Superannuation and Benefits Act 1991, the Trust Deed establishing the Scheme, the requirements of the Superannuation Industry (Supervision) Act 1993 and regulations, and the relevant requirements of the Corporations Act 2001 and regulations (to the extent applicable).

Signed this 23rd day of September 2020 in accordance with a resolution of Directors of Commonwealth Superannuation Corporation (ABN 48 882 817 243) as Trustee of the Scheme.

Patricia Cross - Chair

Garry Hounsell - Director

MilitarySuper Statement of Financial Position As at 30 June 2020

2020

2019

Note

$'000

$'000

Assets

Cash and cash equivalents

31 763

52 327

Employer sponsor receivable

47 506 999

44 381 999

Other receivables

4

8 812

6 410

Investments in pooled superannuation trust

5

10 329 547

10 275 549

Total assets

57 877 121

54 716 285

Liabilities

Benefits payable

(32 489)

(8 813)

Income tax payable

(24 454)

(25 737)

Other payables

(483)

(482)

Deferred tax liabilities

8c

0

(4)

Total liabilities excluding member benefits

(57 426)

(35 036)

Net assets available for member benefits

57 819 695

54 681 249

Member liabilities

9

(57 779 987)

(54 645 049)

Net assets

39 708

36 200

Equity

Operational risk reserve

(39 708)

(36 200)

Total equity

(39 708)

(36 200)

The attached notes form part of these financial statements.

MilitarySuper Income Statement For the Financial Year Ended 30 June 2020

Note

2020

2019

$'000

$'000

Investment revenue

Interest

165

420

Changes in fair value of investments

6c

(90 004)

740 706

Total revenue

(89 839)

741 126

Total expenses

0

0

Operating results

(89 839)

741 126

Net change in member benefits from investing activities

90 161

(740 492)

Operating result before income tax expense

322

634

Income tax expense

8a

(25)

(63)

Operating result after income tax

297

571

The attached notes form part of these financial statements.

MilitarySuper Statement of Changes in Member Benefits For the Financial Year Ended 30 June 2020

Note

2020

2019

$'000

$'000

Opening balance of member benefits at the beginning of the financial year

54 645 049

50 927 624

Contributions:

Member contributions

7a

279 242

271 519

Employer contributions

7a

162 720

171 020

Government co-contributions

7a

872

803

Low income superannuation tax offset

7a

289

435

Income tax on contributions

8b

(24 485)

(25 833)

Net after tax contributions

418 638

417 944

Net appropriation from Consolidated Revenue Fund

7b

943 668

770 024

Benefits to members

7b

(1 258 996)

(977 104)

Net change in member benefits from investing activities

(90 161)

740 492

Net change in member benefits to be funded by employers

3 121 789

2 766 069

Closing balance of member benefits at the end of the financial year

57 779 987

54 645 049

The attached notes form part of these financial statements.

MilitarySuper Statement of Changes in Equity For the Financial Year Ended 30 June 2020

Operational risk reserve

Total equity

$'000

$'000

Opening balance as at 1 July 2018

32 698

32 698

Operating result

571

571

Net transfers (from) / to reserves

2 931

2 931

Closing balance as at 30 June 2019

36 200

36 200

Opening balance as at 1 July 2019

36 200

36 200

Operating result

297

297

Net transfers (from) / to reserves

3 211

3 211

Closing balance as at 30 June 2020

39 708

39 708

The attached notes form part of these financial statements.

MilitarySuper Statement of Cash Flows For the Financial Year Ended 30 June 2020

Note

2020

2019

$'000

$'000

Cash flows from operating activities

Interest received

189

426

Superannuation surcharge paid

(1)

35

Income tax received/(paid)

(63)

(69)

Net cash inflows from operating activities

10b

125

392

Cash flows from investing activities

Purchase of investments

(438 092)

(418 767)

Proceeds from sale of investments

294 099

207 955

Net cash (outflows) from investing activities

(143 993)

(210 812)

Cash flows from financing activities

Contributions received

Employer contributions

162 720

171 020

Member contributions

279 242

271 519

Government co-contributions

872

803

Low income superannuation tax offset

289

435

Income tax paid on contributions

(25 732)

(27 158)

Benefits paid

(1 235 320)

(977 163)

Net appropriation from Consolidated Revenue Fund

941 233

769 193

Net cash inflows from financing activities

123 304

208 649

Net (decrease) in cash held

(20 564)

(1 771)

Cash at the beginning of the financial year

52 327

54 098

Cash at the end of the financial year

10a

31 763

52 327

The attached notes form part of these financial statements.

MilitarySuper Notes to and Forming Part of the Financial Statements

MILITARYSUPER NOTE 1. DESCRIPTION OF THE SCHEME AND THE FUND

The Military Superannuation and Benefits Scheme ('Scheme') (ABN 50 925 523 120) is a hybrid accumulation-defined benefits scheme which provides benefits to its members under the Military Superannuation and Benefits Act 1991 . The Trustee of the Scheme is Commonwealth Superannuation Corporation (CSC) (ABN 48 880 817 243).

The Scheme is operated for the purpose of providing members of the Australian Defence Force (and their dependants or beneficiaries) with lump sum and pension benefits upon retirement, termination of service, death or disablement. For the purposes of the Scheme, the Military Superannuation and Benefits Fund No. 1 (Fund) manages and invests the assets of the Scheme until such time as a benefit is paid. The Fund accepts employer contributions from the Department of Defence, other government contributions, members’ contributions, transfers from other superannuation funds, and contributions made by members for the benefit of their spouse.

The principal place of business and registered office of the Trustee is 7 London Circuit, Canberra, ACT 2601.

The Scheme was closed to new members from 30 June 2016 and a new accumulation plan, Australian Defence Force Superannuation Scheme (ADF) was established for new members of the Australian Defence Force from 1 July 2016, together with a new invalidity scheme, Australian Defence Force Cover.

MILITARYSUPER NOTE 2. BASIS OF PREPARATION

(a) Statement of compliance

The financial report of the Scheme is a general purpose financial report which has been prepared in accordance with Accounting Standards and Interpretations, the Superannuation Industry (Supervision) Act 1993 . For the purposes of preparing financial statements, the Scheme is a not-for-profit entity.

The form of these financial statements has been agreed by the Minister for Finance and the Trustee in accordance with sub-section 30(1)(d) of the Governance of Australian Government Superannuation Schemes Act 2011.

The financial statements of the Scheme were authorised for issue by the Directors of the Trustee on 23 September 2020.

Standards adopted with no significant impact on the financial statements

The following new and revised Standards and Interpretations have been adopted in these financial statements. Their adoption has not had any significant impact on the disclosures or amounts reported in these financial statements but may affect the accounting for future transactions or arrangements.

Standard / Interpretation

Effective for annual reporting periods

AASB 15 'Revenue from Contracts with Customers', AASB 2014-5 'Amendments to Australian Accounting Standards arising from AASB 15', AASB 2015-8 'Amendments to Australian Accounting Standards - Effective Date of AASB 15', and AASB 2016-3 'Amendments to Australian Accounting Standards - Clarifications to AASB 15'

beginning on or after 1 January 2019

AASB 1058 'Income of Not-for-Profit Entities'

beginning on or after 1 January 2019

AASB 2016-8 'Amendments to Australian Accounting Standards – Australian Implementation Guidance for Not-for-Profit Entities'

beginning on or after 1 January 2019

AASB 2017-4 'Amendments to Australian Accounting Standards – Uncertainty over Income Tax Treatments'

beginning on or after 1 January 2019

AASB 2014-10 'Amendments to Australian Accounting Standards – Sale or Contribution of Assets between an Investor and its Associate or Joint Venture', AASB 2015-10 'Amendments to Australian Accounting Standards – Effective Date of Amendments to AASB 10 and AASB 128', AASB 2017-5 'Amendments to Australian Accounting Standards – Effective Date of Amendments to AASB 10 and AASB 128 and Editorial Corrections.'

beginning on or after 1 January 2019

AASB 2017-6 'Amendments to Australian Accounting Standards – Prepayment Features with Negative Compensation'

beginning on or after 1 January 2019

Standards in issue but not yet effective

At the date of authorisation of the financial report, the following Standards which are expected to be relevant to the Scheme were in issue but not yet effective. The directors anticipate the adoption of these Standards will have no material financial impact on the financial report of the Scheme.

Standard / Interpretation

Effective for annual reporting periods beginning on or after

Expected to be initially applied in the financial year ending

AASB 2018-7 'Amendments to Australian Accounting Standards – Definition of Material'

1 January 2020

30 June 2021

AASB 2019-1 'Amendments to Australian Accounting Standards – References to the Conceptual Framework'

1 January 2020

30 June 2021

AASB 2019-5 'Amendments to Australian Accounting Standards - Disclosure of the Effect of New IFRS Standards Not Yet Issued in Australia'

1 January 2020

30 June 2021

AASB 2020-1 'Amendments to Australian Accounting Standards – Classification of Liabilities as Current or Non-current'

1 January 2022

30 June 2023

AASB 2020-3 'Amendments to Australian Accounting Standards – Annual Improvements 2018–2020 and Other Amendments'

1 January 2022

30 June 2023

(b) Functional and presentation currency

The financial statements are presented in Australian dollars, which is the functional currency of the Scheme.

Amounts in these financial statements have been rounded to the nearest thousand dollars, unless otherwise indicated.

(c) Use of judgements and estimates

In the application of Accounting Standards, management is required to make judgements, estimates and assumptions about carrying values of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstance, the results of which form the basis of making the judgements. Actual results may differ from these estimates.

The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods.

Judgements made by management in the application of Accounting Standards that have significant effects on the financial statements, and estimates with a significant risk of material adjustments in the next year are disclosed, where applicable, in the relevant notes to the financial statements.

(d) Going Concern

The financial report has been prepared on a going concern basis, which contemplates the continuation of normal business operations and the realisation of assets and settlement of liabilities in the normal course of business. In making this assessment, the directors of the Trustee have considered future events and conditions for the period of twelve months following the approval of these financial statements, including the impact of the outbreak of COVID-19 which was declared by the World Health Organisation as a “Global Pandemic” on 11 March 2020. Whilst the situation remains uncertain, the Trustee remains confident that the Scheme will be able to continue as a going concern as the Scheme's assets significantly outweigh its liabilities and it has sufficient liquidity to meet its debts as and when they fall due.

MILITARYSUPER NOTE 3. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES

The accounting policies set out below have been applied in preparing the financial statements for the year ended 30 June 2020 and the comparative information presented in these financial statements for the year ended 30 June 2019.

(a) Cash and cash equivalents

Cash and cash equivalents include cash at bank used to transact member and employer contributions, transfers to and from other funds, benefit payments and tax liabilities.

(b) Financial assets

Financial assets (being investments in a pooled superannuation trust, cash at bank and other receivables) are recognised on the date the Fund becomes a party to the contractual provisions of the asset. Financial assets are recognised using trade date accounting. After initial measurement, any gains and losses from changes in fair value are recognised in the Income Statement.

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction in the principal (or most advantageous) market at the measurement date under current market conditions, regardless of whether that price is directly observable or estimated using another valuation technique.

Fair values have been determined as follows:

(i) Units in a pooled superannuation trust are valued at the redemption price at close of business on the last business day of the reporting period as notified by the manager of the trust, reflecting the fair value of the underlying investments.

(ii) Other receivables are recognised at nominal amounts due which approximate fair value. All amounts are unsecured and are subject to normal credit terms.

(c) Employer sponsor receivable

The Commonwealth Government is obliged under the Military Superannuation and Benefits Act 1991 to meet any funding shortfall for the defined benefit member liabilities of the Scheme. The asset is measured at its 'intrinsic value' (i.e. the amount of the difference between member liability and the fair value of assets available to meet that liability). The value of the employer sponsor receivable will not necessarily be the same as the value of the corresponding liability in the accounts of the employer sponsor and the Australian Government Long Term Cost Report due to the application of different accounting standards which may result in different valuation assumptions from those set out in Note 9.

(d) Foreign currency transactions

The Scheme does not undertake transactions denominated in foreign currencies.

(e) Payables

Payables (being benefits payable and other payables) are recognised at their nominal value which is equivalent to fair value.

Benefits payable

Benefits payable to a member are recognised where a valid withdrawal notice has been received from the employer sponsor, and approved, but payment has not been made by reporting date.

Other payables

Other payables represent liabilities for services provided during the financial period and which are unpaid at reporting date. All amounts are unsecured. Creditors are subject to normal credit terms.

(f) Member liabilities

Defined benefit member liabilities are measured as the amount of a portfolio of investments that would be needed as at the reporting date to yield future net cash inflows that would be sufficient to meet accrued benefits as at that date when they are expected to fall due (Note 9).

The impact of the Scheme's default death and invalidity insurance arrangements have been considered in determining member liabilities. Balances and transactions in respect of these arrangements are presented in aggregate as part of member liabilities and the benefits paid/payable balances presented in the Statement of Financial Position and Statement of Changes in Member Benefits.

(g) Contribution revenue and transfers from other funds

Employer and member contributions, superannuation co-contributions, low income superannuation tax offsets from the Commonwealth Government and transfers from other funds are recognised when control of the contribution or transfer has passed to the Scheme.

(h) Operational risk reserve

The purpose of the operational risk reserve (ORR) is to provide adequate financial resources to address potential losses arising from an operational risk event. The ORR is operated in accordance with an ORR policy. The level of the reserve is determined by the Trustee Directors and reviewed annually, based on an assessment of the risks faced by the Fund. The transferred assets underlying the ORR are held in a separate cash option of the ARIA Investments Trust ('the AIT') and income earned on these assets is recognised in the reserve.

(i) Derivatives

The Scheme does not directly enter into derivative financial instruments.

(j) Revenue

Revenue is recognised to the extent that it is probable that the economic benefits will flow to the entity and the revenue can be reliably measured. Specific revenues are recognised as follows: The Scheme does not directly enter into derivative financial instruments.

Investment revenue

Interest revenue is recognised on an accrual basis.

Changes in the fair value of investments are recognised as income and are determined as the difference between the fair value at year end or consideration received (if sold during the year) and the fair value as at the prior year end or cost (if the investment was acquired during the period).

(k) Expenses

Expenses are recognised on an accruals basis and, if not paid at reporting date, are reflected in the Statement of Financial Position as an accrual or payable depending upon whether or not the expense has been billed.

(l) Income tax

Income tax is recognised in the Income Statement and the Statement of Changes in Member Benefits. As the Scheme invests in the AIT, which is a pooled superannuation trust, tax on this investment revenue is paid by the AIT.

Current tax

Current tax is calculated by reference to the amount of income taxes payable or recoverable in respect of the taxable profit or loss for the period. It is calculated using tax rates and tax laws that have been enacted or substantively enacted by reporting date. Current tax for the current and prior periods is recognised as a liability (or asset) to the extent that it is unpaid (or refundable).

Deferred tax

Deferred tax is accounted for using the comprehensive balance sheet liability method in respect of temporary differences between the carrying amount of assets and liabilities in the financial statements and the corresponding tax base of those items.

In principle, deferred tax liabilities are recognised for all taxable temporary differences. Deferred tax assets are recognised to the extent that it is probable that sufficient taxable amounts will be available against which deductible temporary differences or unused tax losses and tax offsets can be utilised. However, deferred tax assets and liabilities are not recognised if the temporary differences giving rise to them arise from the initial recognition of assets and liabilities (other than as a result of a business combination) which affects neither taxable income nor accounting profit.

Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period(s) when the asset and liability giving rise to them are realised or settled, based on tax rates (and tax laws) that have been enacted or substantively enacted by reporting date. The measurement of deferred tax liabilities and assets reflects the tax consequences that would follow from the manner in which the Scheme expects, at the reporting date, to recover or settle the carrying amount of its assets and liabilities.

Deferred tax assets and liabilities are offset when they relate to income taxes levied by the same taxation authority and the Scheme intends to settle its current tax assets and liabilities on a net basis.

Current and deferred tax for the period

Current and deferred tax for the period is recognised as an expense or benefit in the Income Statement, except for tax on contributions, which is recognised in the Statement of Changes in Member Benefits.

(m) Goods and services tax ('GST')

Revenues, expenses and assets are recognised net of the amount of goods and services tax ('GST') recoverable from the Australian Taxation Office (ATO) as a reduced input tax credit. Where the amount of GST incurred is not recoverable from the ATO, it is recognised as part of the cost of acquisition of an asset or as an expense item.

Receivables and payables are recognised inclusive of GST.

The net amount of GST recoverable from, or payable to, the ATO is included as an asset or liability in the Statement of Financial Position.

Cash flows are included in the Statement of Cash Flows on a gross basis. The GST component of cash flows arising from investing and financing activities which is recoverable from, or payable to, the taxation authority is classified within operating cash flows.

MILITARYSUPER NOTE 4. OTHER RECEIVABLES

2020

2019

$'000

$'000

Receivable from the ARIA Investments Trust

34

43

Interest receivable

3

27

Amount to be appropriated from Consolidated Revenue Fund

8 775

6 340

Total

8 812

6 410

There are no receivables that are past due or impaired (2019: Nil).

MILITARYSUPER NOTE 5. INVESTMENTS

2020

2019

$'000

$'000

Pooled Superannuation Trust - ARIA Investments Trust

10 329 547

10 275 549

10 329 547

10 275 549

MILITARYSUPER NOTE 6. CHANGES IN FAIR VALUE OF INVESTMENTS

2020

2019

$'000

$'000

(a) Investments held at 30 June

Pooled Superannuation Trust - ARIA Investments Trust

(89 502)

737 852

(b) Investments realised during the year:

Pooled Superannuation Trust - ARIA Investments Trust

(502)

2 854

(c) Total changes in net market values of investments

(90 004)

740 706

MILITARYSUPER NOTE 7. FUNDING ARRANGEMENTS

(a) Contributions

Member Contributions

Members contribute to the Scheme each fortnight at optional rates ranging from a minimum of 5% of salary, to a maximum of 10% of salary. The contribution rates were the same in the prior year.

Employer Contributions

The Department of Defence contributes to the Scheme each fortnight in respect of each member at the rate of 3% of the member’s salary. The contribution rates were the same in the prior year. Employers may also make salary sacrifice contributions (before tax) and Ordinary Time Earnings top up contributions to the Scheme on behalf of members.

Transferring Superannuation Benefits From Other Funds

Money invested in other superannuation funds can be rolled over to the Scheme.

Government Co-Contributions

For the financial years ended 30 June 2019 and 30 June 2020, the Commonwealth Government contributed $0.50 for every $1.00 of eligible personal after-tax member contributions paid to the Scheme up to a maximum of $500 per member.

Low Income Superannuation Tax Offset

The low income superannuation tax offset (LISTO) is a Commonwealth Government superannuation payment of up to $500. LISTO payments are recognised as revenue when received.

(b) Benefits

The benefits payable from the Scheme comprise a lump sum of accumulated member contributions and a defined benefit financed by the employer and calculated on the basis of the member’s final average salary and length of service. The defined benefit may be taken as a lump sum or as a pension or as a combination of lump sum and pension. The defined benefit consists of a funded component (the accumulated value of contributions made to the Fund by the Department of Defence) and an unfunded component (the balance of the defined benefit).

In general, when a benefit becomes payable to a member, the accumulated member and employer contributions held in the Fund in respect of the member are transferred to the Consolidated Revenue Fund (CRF) which pays out the total benefit (both funded and unfunded components).

Appropriation refers to the total amount paid from the CRF. The appropriation from CRF shown in the Statement of Changes in Member Benefits is the net amount after taking into account transfers from the Fund to the CRF.

Of the total benefits payable as at 30 June 2020, $6.42 million (2019: $4.07 million) is payable by the Consolidated Revenue Fund. The Commonwealth is the corresponding debtor for this amount in accordance with the funding arrangements described above.

Benefits paid and payable by the Fund and the Consolidated Revenue Fund during the year are as follows:

2020

2019

$'000

$'000

Gross Appropriation from Consolidated Revenue Fund

1 112 648

912 717

less: Transfers from Fund to Consolidated Revenue Fund

(168 980)

(142 693)

Net Appropriation

943 668

770 024

Consolidated Revenue Fund

Lump-sum benefits

193 933

156 569

Pensions

918 715

756 148

1 112 648

912 717

Military Superannuation & Benefits Fund

Lump-sum benefits

146 348

64 387

Total benefits paid and payable

1 258 996

977 104

(c) Costs of managing, investing and administering the Fund

Costs of and incidental to the management of the Scheme and the investment of its money are charged against the assets of the AIT that are referable to the Fund. Transactions in respect of these costs have been brought to account in the financial statements of the AIT.

Expenses met by the AIT and referable to the Fund are as follows:

2020

2019

$'000

$'000

Investment

Investment manager fees

37 947

27 966

Custodian fees

1 462

1 299

Investment consultant and other service provider fees

2 965

1 460

Other investment expenses

1 232

666

Total direct investment expenses

43 606

31 391

Regulatory fees

847

754

Other operating expenses

9 972

8 602

Total costs

54 425

40 747

Administrative fees are paid to CSC by the Department of Defence to meet costs other than those incurred in managing and investing Fund assets. The sponsoring employer has contributed further administration funding of $22.26 million (2019: $22.33 million). Transactions in respect of the receipt of these fees and the costs of administration have been brought to account in the financial statements of the Trustee.

MILITARYSUPER NOTE 8. INCOME TAX

(a) Income tax recognised in the Income Statement

2020

2019

$'000

$'000

(a)

Income tax recognised in the Income Statement

Tax expense comprises:

Current tax expense

29

64

Deferred tax expense relating to the origination and reversal

of temporary differences

(4)

(1)

Total tax expense

25

63

The prima facie income tax expense on the operating result before income tax reconciles to the income tax expense in the Income Statement as follows:

Operating result before income tax expense

322

634

Income tax expense / (benefit) calculated at 15%

48

95

Net change in member benefits from investing activities

(13 524)

111 074

Investment revenue already taxed

13 501

(111 106)

Total tax expense

25

63

(b) Income tax on contributions recognised in Statement of Changes in Member Benefits

2020

2019

$'000

$'000

Contributions received:

Member contributions

279 242

271 519

Employer contributions

162 720

171 020

Government co-contributions

872

803

Low income superannuation tax offset

289

435

Total contributions received

443 123

443 777

Contributions tax calculated at 15%

66 468

66 567

Member contributions not subject to tax

(41 886)

(40 728)

Government co-contributions not subject to tax

(131)

(121)

Low income superannuation tax offset not subject to tax

(43)

(65)

Rollovers in subject to tax

77

81

Under/(over) relating to prior year

0

99

Total contributions tax expense

24 485

25 833

(c) Recognised deferred tax assets and liabilities

2020

2019

$'000

$'000

(c)

Recognised deferred tax assets and liabilities

Deferred tax liabilities comprise:

Temporary differences

0

4

0

4

Taxable and deductible temporary differences arise from the following:

2020

Opening balance

Charged to

income

Closing balance

$'000

$'000

$'000

Gross deferred tax liabilities:

Interest receivable

4

(4)

0

4

(4)

0

Net deferred tax liabilities

4

(4)

0

2019

Opening balance

Charged to

income

Closing balance

$'000

$'000

$'000

Gross deferred tax liabilities:

Interest receivable

5

(1)

4

5

(1)

4

Net deferred tax liabilities / (assets)

5

(1)

4

MILITARYSUPER NOTE 9. MEMBER LIABILITIES

The Scheme engages qualified actuaries on an annual basis to measure defined benefit liabilities. The value of the member liabilities will not necessarily be the same as the value presented in the accounts of the employer sponsor and the Australian Government Long Term Cost Report due to the application of different accounting standards which may result in different valuation assumptions. The liabilities change from year to year as a result of contributions, benefit payments, interest costs and investment returns relative to the actuarial assumptions adopted.

The Scheme uses sensitivity analysis to monitor the potential impact of key changes to key variables about which the assumptions need to be made. The Scheme has identified four assumptions (being the mortality rates, the discount rate/investment returns, the rate of salary adjustment and the inflation rate) for which changes are reasonably possible that would have a material impact on the amount of the defined benefit member liabilities:

  • The current mortality assumptions adopted are scheme specific based on the experience observed. There has been no change to these assumptions from the prior year.
  • The assumed discount rate has been determined by reference to the target investment returns expected on the investment portfolio, which reflect the opportunities reasonably available to the Scheme in the investment markets. There has been no change to this assumption from the prior year.
  • The assumed annual salary adjustment has been determined by historical observations over a long term period and in consultation with the employer sponsor. There has been no change to this assumption from the prior year.
  • The assumed inflation rate has been determined based on the mid-point of the Reserve Bank of Australia (RBA) inflation target. There has been no change to this assumption from the prior year.

Other variables about which assumptions have been made in measuring defined benefit member liabilities and for which changes are not considered reasonably possible, or for which reasonably possible changes would not be expected to have a material effect, include resignation rates.

The following are sensitivity calculations on a univariate basis for the mortality rates, the discount rate/investment returns, the rate of salary adjustment and the inflation rate assumptions for the Scheme.

Key assumptions

Assumed at reporting date

Reasonably Possible Change

(Increase) / Decrease in defined benefit member liabilities ($'000)

30 June 2020

Discount rate / investment returns

6%

+ 1%

- 1%

(8 453 000)

11 399 000

Salary adjustment rate

4%

+ 1%

- 1%

1 578 000

(1 403 000)

Inflation rate

2.5%

+ 1%

- 1%

9 422 000

(7 297 000)

Mortality rates

A scale developed by the Scheme actuary with allowance for mortality improvements

5.0% higher mortality* - 5.0% lower mortality*

(275 000)

284 000

30 June 2019

Discount rate / investment returns

6%

+ 1%

- 1%

(8 048 000)

10 897 000

Salary adjustment rate

4%

+ 1%

- 1%

1 527 000

(1 476 000)

Inflation rate

2.5%

+ 1%

- 1%

8 805 000

(7 033 000)

Mortality rates

A scale developed by the Scheme actuary with allowance for mortality improvements

5.0% higher mortality* - 5.0% lower mortality*

(246 000)

247 000

* For example, if the base probability of death of 3.0%, the higher rate is 3.15% and the lower rate is 2.85%.

Vested benefits are benefits which are not conditional upon continued membership of the Scheme (or any other factor other than resignation from the Scheme) and include benefits which members were entitled to receive had they terminated their Scheme membership as at the reporting date.

An actuarial estimate of vested benefits at 30 June 2020 is $53.4 billion (2019: $49.5 billion). The value of vested benefits represents the liability that would have fallen on the Scheme if all members had ceased service on 30 June 2020 and elected the option which maximised their benefit entitlement.

The vested benefits have been calculated on the basis of current legislative arrangements as at the reporting date.

MILITARYSUPER NOTE 10. CASH FLOW INFORMATION

(a) Reconciliation of Cash

For the purposes of the Statement of Cash Flows, cash represents cash at bank. Cash at the end of the reporting period as shown in the Statement of Cash Flows is reconciled to the related items in the Statement of Financial Position as follows:

2020

2019

$'000

$'000

Cash at bank

31 763

52 327

(b) Reconciliation of operating results after income tax to net cash inflows / (outflows) from operating activities

Operating result after income tax

297

571

Net change in member benefits from investing activities

(90 161)

740 492

Changes in fair value of investments

90 004

(740 706)

Decrease/(increase) in interest receivable

24

6

(Decrease)/increase in other payables

1

35

(Decrease)/increase in income tax payable

(40)

(6)

Net cash inflows from operating activities

125

392

MILITARYSUPER NOTE 11. AUDITOR'S REMUNERATION

Amounts paid or payable to the Australian National Audit Office for audit services:

2020

2019

$

$

Financial statements

50 600

48 600

Regulatory returns and compliance

34 400

32 400

Total

85 000

81 000

The audits were provided by the Australian National Audit Office. The audit fees will be charged against the assets of the ARIA Investments Trust that are referable to the Fund.

Deloitte Touche Tohmatsu have been contracted by the Australian National Audit Office to provide audit services on its behalf. Fees for those services are included above.

No other services were provided by the Australian National Audit Office or Deloitte Touche Tohmatsu to the Scheme during the reporting period.

MILITARYSUPER NOTE 12. FINANCIAL INSTRUMENTS

(a) Financial instruments management

A financial instrument is any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity.

The investments of the Fund (other than cash held for managing contribution receipts, benefit payments and tax payments) comprise units in the AIT. The AIT is a pooled superannuation trust which is also governed by the Commonwealth Superannuation Corporation as Trustee. This type of investment has been determined by the Trustee to be appropriate for the Fund and is in accordance with the Fund's published investment strategy. The Trustee applies strategies to manage risk relating to the investment activities of the AIT. The investments of the AIT are managed on behalf of the Trustee by specialist sector fund managers who are required to invest the assets in accordance with contractual investment mandates.

(b) Significant accounting policies

Details of the significant accounting policies and methods adopted, including the criteria for recognition, the basis of measurement and the basis on which income and expenses are recognised in respect of each class of financial asset and financial liability are disclosed in Note 3 to the financial statements.

(c) Capital risk management

The Registerable Superannuation Entity ('RSE') licence of the Trustee of the Scheme requires the Trustee to maintain adequate financial resources to address losses arising from operational risks that may affect registrable superannuation entities within its business operations in the form of operational risk reserve(s), operational risk trustee capital or a combination thereof to meet the target amount of financial resources that the RSE licensee determines is necessary to respond to these losses. The Trustee of the Scheme was in compliance with this requirement throughout the reporting period.

(d) Categories of financial instruments

The financial assets and liabilities of the Scheme are recognised at fair value as at the reporting date. Changes in fair value are recognised in the Income Statement and the Statement of Changes in Member Benefits.

(e) Financial risk management objectives

The Fund is exposed to a variety of financial risks as a result of its pooled investment in the AIT. These risks include market risk (including currency risk, fair value interest rate risk and price risk), credit risk, liquidity risk and cash flow interest rate risk. The Fund's risk management and investment policies, approved by the Trustee, seek to minimise the potential adverse effects of these risks on the Fund’s financial performance. These policies may include the use of financial derivative instruments.

The Trustee is responsible for ensuring that there is an effective risk management control framework in place for the Fund. Consistent with regulatory requirements, the Trustee has developed, implemented and maintains a Risk Management Framework to identify the policies, procedures, processes and controls that comprise its risk management and control systems for the Scheme and for the Fund's investments through the AIT. The overall investment strategy of the Fund is set out in the Trustee's approved investment policies which address the investment strategy and objectives and risk mitigation strategies including risk mitigation relating to the use of derivatives.

The Trustee's internal investment team monitors and manages the financial risks relating to the Fund's investments. Derivative Risk Statements set out the strict parameters for the Trustee's investment managers authorised to use derivatives. In essence, derivatives cannot be used to raise the level of risk above the level it would otherwise have been, and derivatives cannot be used to leverage the investments.

The Fund's investments are managed on behalf of the Trustee by specialist external investment managers who invest their respective fund allocation in accordance with the terms of a written investment mandate or disclosure document. The Trustee has determined that the appointment of these managers is appropriate for the Fund and is in accordance with its investment strategy.

(f) Credit risk

Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to the Fund. In its capacity as trustee of the AIT, the Trustee has adopted a policy of spreading the aggregate value of transactions across approved creditworthy counterparties as a means of mitigating the risk of financial loss. The Fund's exposure to its counterparties are continuously monitored by the Trustee.

The largest exposure to a single counterparty is to cash held by the investment master custodian Northern Trust. Credit risk relating to the master custodian is mitigated through contract indemnity provisions. Other than the master custodian, no individual exposure within the AIT exceeded 5% of net assets of that trust at 30 June 2020 or 30 June 2019.

The credit risk on the Fund's directly held cash and cash equivalents and interest receivable is limited because the counterparty is the Reserve Bank of Australia.

The table below shows the maximum exposure of financial assets to credit risk at the reporting date:

2020

2019

$'000

$'000

Investments

Pooled Superannuation Trust - ARIA Investments Trust

10 329 547

10 275 549

Other financial assets

Cash and cash equivalents

31 763

52 327

Other receivables

8 812

6 410

10 370 122

10 334 286

There has been an increase in the Scheme's exposure to credit risk during the period arising from increased volatility in the market. The Trustee's existing policies and procedures were appropriate to manage this increase in exposure and therefore there has been no change to the manner in which the Trustee manages and measures credit risk since the 2019 period.

(g) Liquidity risk

Liquidity risk is the risk that the Scheme will encounter difficulty in either realising assets or otherwise raising sufficient funds to meet its liabilities and/or member benefit payments or tax liabilities.

The Trustee's approach to managing liquidity is to ensure that the Fund will always have sufficient liquidity to meet its liabilities as they fall due. On resignation the member benefit accrued before 30 June 1999 can be paid as a lump sum but the balance must be preserved until the member’s preservation age, either in the Fund or another complying superannuation fund. The employer benefit, including productivity component, must be preserved in the Fund. The unfunded component of benefit payments is financed by the Commonwealth, from the CRF. As such there is minimal liquidity risk.

The Fund's exposure to liquidity risk is therefore limited to those circumstances in which the Scheme Rules allow members to withdraw benefits.

The Trustee undertakes forecasting and scenario testing of the cashflow requirements of the Fund to ensure timely access to sufficient cash and holds actively-traded, highly-liquid investments to meet anticipated funding requirements. As a further risk mitigation strategy, it is the Trustee's policy that the target asset allocation to illiquid assets is limited to around 25% of the investments of the AIT (with a plus or minus 10 percentage point rebalancing range around that target). Regular scenario testing is performed to confirm the validity of the strategy.

The following tables summarise the maturity profile of the Scheme’s financial liabilities. The tables have been drawn up based on the discounted cash flows of financial liabilities based on the earliest date on which the Scheme expects to pay. The tables include both interest and principal cash flows.

Financial Liabilities maturity profile:

Less than 3

months

3 months

to 1 year

1-5 years

Over 5

years

Total

$'000

$'000

$'000

$'000

$'000

30 June 2020

Other payables

483

0

0

0

483

Benefits payable

32 489

0

0

0

32 489

Member liabilities

335 000

996 000

5 502 000

50 946 987

57 779 987

Total financial liabilities

367 972

996 000

5 502 000

50 946 987

57 812 959

30 June 2019

Other payables

482

0

0

0

482

Benefits payable

8 813

0

0

0

8 813

Member liabilities

258 000

816 000

4 899 000

48 672 049

54 645 049

Total financial liabilities

267 295

816 000

4 899 000

48 672 049

54 654 344

There has been an increase in the Scheme's exposure to liquidity risk during the period arising from increased volatility in the market. The Trustee's existing policies and procedures were appropriate to manage this increase in exposure and therefore there has been no change to the manner in which the Trustee manages and measures liquidity risk since the 2019 period.

h) Market risk

Market risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices. Market risk comprises three types of risk: foreign currency risk, interest rate risk and other market price risk. The policies and procedures put in place to mitigate the exposure to market risk are detailed in the Trustee's investment policies and the Risk Management Framework.

There has been an increase in the Scheme's exposure to market risk during the period arising from increased volatility in the market. The Trustee's existing policies and procedures were appropriate to manage this increase in exposure and therefore there has been no change to the manner in which the Trustee manages and measures market risk since the 2019 period.

Foreign currency risk

Foreign currency risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates.

The Scheme does not undertake any transactions in foreign currency and is therefore not directly exposed to foreign currency risk. However, the Fund is indirectly exposed to foreign currency risk from the international assets held in the AIT, and it is managed in accordance with the Trustee’s approved investment strategy. The AIT enters into forward foreign exchange contracts to hedge into Australian dollars some of the currency exposure arising from its investments denominated in developed markets foreign currencies. These contracts neutralise some of the gains and losses from currency fluctuation. A small part of the investments of the AIT, relating to emerging markets, remain unhedged due to lack of suitable currency instruments for hedging.

Interest rate risk

Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates.

The Scheme is directly exposed to interest rate risk on cash and cash equivalents held with the Reserve Bank of Australia to meet benefits and taxation payments. All holdings at 30 June 2020 and 30 June 2019 had a maturity profile of less than one month.

The Fund is indirectly exposed to interest rate risk through its investments in the AIT. The Trustee manages interest rate risk through its investment strategy including diversification of asset allocation and the use of a diversity of specialist investment sector managers.

The following table illustrates the Scheme's sensitivity to a 0.09% p.a. (2019: 0.20%) increase or decrease in interest rates, based on cash balances directly held at reporting date. This represents an assessment of a reasonably possible change in interest rates. Had interest rates been lower or higher by 0.09% (2019: 0.20%) at reporting date, and all other variables were held constant, the financial result would have improved / (deteriorated) as demonstrated:

Carrying amount

$'000

Interest rate risk $' 000

Operating Result Before

Tax

Net Assets Available to Pay

Benefits

Operating Result Before

Tax

Net Assets Available to Pay Benefits

2020

Cash and cash equivalents 2019

Cash and cash equivalents

-0.09%

+0.09%

31 763

(29)

(29)

29

29

-0.20%

+0.20%

52 327

(105)

(105)

105

105

In the Trustee's opinion, the sensitivity analysis at reporting date approximates the direct interest rate exposures of the Scheme during the financial year.

Other price risk

Other price risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices (other than those arising from interest rate risk or currency risk), whether caused by factors specific to an individual investment, its issuer or factors affecting all similar financial instruments traded in the market.

The Fund's investment in the AIT is exposed to market price risk in respect of the latter's holdings of equity securities and unit trusts. As the investment in the AIT is carried at fair value through profit or loss, all changes in market conditions will directly affect the Scheme's net investment income.

In its capacity as trustee of the AIT, the Trustee manages the market price risk arising from these investments by diversifying the portfolio in accordance with its investment strategy.

The following table illustrates the Scheme's sensitivity to a reasonably possible change in the value of its investment in the AIT, based on risk exposures at reporting date. The volatility factor of 5.00% (2019: 3.90%) represents the volatility in the default option unit price of the Schemes Investment in the AIT and is reflective of market conditions as at reporting date. For the Cash option and the investments backing the operational risk reserve a factor of 0.09% (2019: 0.20%) has been applied representing a reasonably possible change in interest rates based on market conditions at reporting date, as a proxy for price risk of the option. Had the unit price been higher or lower by the volatility factor at reporting date, and all other variables were held constant, the financial result would have improved/(deteriorated) as follows:

Change in price

Carrying amount

$'000

Price risk $' 000

Operating Result Before Tax

Net Assets Available to Pay Benefits

Operating Result Before Tax

Net Assets Available to Pay Benefits

(Lower price)

Higher price

2020

Financial Assets

ARIA Investments Trust :

Balanced option

-/+5.00%

9 154 273

(457 714)

(457 714)

457 714

457 714

Cash option

-/+0.09%

131 163

(118)

(118)

118

118

Income focused option

-/+2.20%

68 500

(1 507)

(1 507)

1 507

1 507

Aggressive option

-/+5.70%

935 937

(53 348)

(53 348)

53 348

53 348

Operational risk reserve

-/+0.09%

39 674

(36)

(36)

36

36

Total increase / (decrease)

10 329 547

(512 723)

(512 723)

512 723

512 723

2019

Financial Assets

ARIA Investments Trust :

Balanced option

-/+3.90%

9 256 269

(360 994)

(360 994)

360 994

360 994

Cash option

-/+0.20%

70 494

(141)

(141)

141

141

Income focused option

-/+1.80%

55 164

(993)

(993)

993

993

Aggressive option

-/+4.70%

857 465

(40 301)

(40 301)

40 301

40 301

Operational risk reserve

-/+0.20%

36 157

(72)

(72)

72

72

Total increase / (decrease)

10 275 549

(402 501)

(402 501)

402 501

402 501

In the Trustee's opinion, the sensitivity analysis at reporting date is representative of the other market price exposures during the financial year.

(i) Fair value measurement

The Scheme's financial instruments are included in the Statement of Financial Position at fair value. The fair value is determined per the accounting policies in Note 3.

Fair value measurements recognised in the Statement of Financial Position

The following table provides an analysis of the Scheme's financial instruments whereby the assets and liabilities are each grouped into one of three categories based on the degree to which their method of valuation is observable.

Level 1: fair value measurements are those derived from quoted prices in active markets.

Level 2: fair value measurements are those derived from inputs (other than quoted prices included within Level 1) that are observable such as prices or derived from prices.

Level 3: fair value measurements are those derived from valuation techniques that include inputs that are not based on observable market data.

Level 1

Level 2

Level 3

Total

$'000

$'000

$'000

$'000

2020

Financial Assets

Pooled superannuation trust

0

10 329 547

0

10 329 547

2019

Financial Assets

Pooled superannuation trust

0

10 275 549

0

10 275 549

There were no transfers between Level 1 and 2 in the period.

Units in the pooled superannuation trust are valued daily based on the latest listed and unlisted market prices and values of the underlying investments, less any tax and expenses.

Reconciliation of Level 3 fair value measurements

There were no Level 3 financial assets or liabilities (2019: Nil).

Fair value measurements of the underlying investments

The funded components of the Schemes for which CSC is the Trustee are co-invested in a pooled superannuation trust. The following table provides an analysis of the underlying pooled superannuation trust’s investments grouped into levels 1 to 3 of the fair value hierarchy based on the degree to which their fair value is observable. The table has been prepared on a look-through basis and therefore discloses investments held in underlying Trustee-controlled subsidiary trusts as if they are direct investments of the pooled superannuation trust.

Level 1

Level 2

Level 3

Total

$’000

$’000

$’000

$’000

2020

Cash and cash equivalents

3 166 899

0

0

3 166 899

Money market investments

4 740 006

0

0

4 740 006

Fixed interest investments

5 302 424

6 358

311 385

5 620 167

Equity investments

20 768 429

5 369 415

4 964 157

31 102 001

Property investments

0

0

4 188 290

4 188 290

Derivatives contracts (net)

(1 035)

573 868

3 958

576 791

TOTAL

33 976 723

5 949 641

9 467 790

49 394 154

2019

Cash and cash equivalents

2 615 412

0

0

2 615 412

Money market investments

2 691 508

0

0

2 691 508

Fixed interest investments

5 488 013

0

290 904

5 778 917

Equity investments

22 645 916

7 827 387

3 870 952

34 344 255

Property investments

0

0

4 439 489

4 439 489

Derivatives contracts (net)

(22 758)

(25 572)

0

(48 330)

TOTAL

33 418 091

7 801 815

8 601 345

49 821 251

The fair values of the pooled superannuation trust’s investments is determined as follows:

I. Cash comprises demand deposits with a bank, financial institution or futures broker. Cash equivalents are short-term, highly-liquid investments that are readily convertible to known amounts of cash and which are subject to insignificant risk of changes in value.

II. Money market investments are valued at the market closing price on the last business day of the reporting period and include accrued interest.

III. Fixed interest securities are valued at their market value at close of business on the last business day of the reporting period.

IV. Equity securities and listed trusts are valued at the last sale price at close of business on the last business day of the reporting period.

V. Private equity funds are valued according to the most recent valuation obtainable from an independent (third party) valuer or an investment manager, applying valuation and disclosure guidelines consistent with the International Equity & Venture Capital Valuation Guidelines.

VI. Unlisted trusts (including pooled superannuation trusts and hedge funds) are valued at their most recent redemption price as determined by the manager of the relevant trust. Unlisted trusts controlled by the Trustee are valued at least annually in accordance with valuation guidelines agreed by the Trustee. Valuations may be completed by an independent valuer, the external investment manager or the Trustee. In determining the valuation, reference is made to guidelines set by relevant associations.

VII. Investment properties which comprise land and buildings for the purpose of letting to produce rental income, are initially measured at cost. Cost includes capital expenditure subsequent to acquisition. Investment properties are not depreciated. Subsequent to initial recognition, investment properties are measured at fair value. Investment properties are independently revalued at least annually. Valuations are performed by registered valuers. In determining the fair value, the expected net cash flows are discounted to their present value using a market determined risk adjusted rate. This is compared against valuations based on capitalised earnings methodologies as well as comparable market transactions.

VIII. Futures contracts are valued at market closing prices quoted on the last business day of the reporting period.

IX. Forward currency contracts and swaps are valued using prices obtained from independent providers as at the last business day of the reporting period (or alternatively from counterparties or the external investment managers where a provider does not supply a price).

X. Exchange traded options are valued as the premium payable or receivable to close out the contracts at the last buy price at close of business on the last business day of the reporting period.

Fair value in an inactive or unquoted market.

The fair value of financial assets and liabilities that are not traded in an active market is determined using valuation techniques. These include the use of recent arm's length market transactions, reference to the current fair value of a substantially similar instrument, discounted cash flow techniques, option pricing models or any other valuation technique that provides a reliable estimate of prices obtained in actual market transactions.

Fair value in an inactive or unquoted market (continued)

The COVID-19 pandemic has impacted global economic activity and, to varying degrees, financial markets around the world. As a result assessing fair value as at reporting date involves increased uncertainties around the underlying assumptions for valuations given the very wide range of potential paths forward for both economies, policy responses and asset fundamentals. Additionally, very low, if any, transaction volumes make evidential valuation difficult. The independent valuations received for some property and infrastructure investments have been reported on the basis of “significant valuation uncertainty”, meaning the valuation is current at the date of valuation only. The value assessed may change significantly over a relatively short period of time. The valuers confirmed inclusion of the “significant valuation uncertainty” declaration does not mean valuations cannot be relied upon. Rather, the phrase is used in order to be clear, transparent and indicate that, in the current extraordinary circumstances, less certainty should be attached to valuations than would otherwise be the case and input assumptions may have to change materially as conditions evolve.

There has been no change to the Trust’s valuation policies for the year ended 30 June 2020.

The Trustee’s Valuation of Investments Policy and Procedures provides that if a price is not at market value (due to illiquidity, suspension, a material event or otherwise), the Trustee may vary the value of the asset in accordance with the internal governance processes for the adjustment as outlined in the Policy. The objective of this special situations process is to preserve equity across member outcomes, regardless of their choices, by mitigating against the risk that in major disruptions, the effect of normal delays in the reporting of private equity fund valuations is materially amplified.

Given the uncertainties surrounding financial markets due to the COVID-19 pandemic and the expectation that these uncertainties will not reverse or be resolved within a single valuation cycle, the Trustee executed a special situation Trustee valuation adjustment for the valuation of private equity funds in accordance with the Policy.

Given the public-markets evidence; the genuine uncertainties surrounding financial markets asset fundamentals due to the COVID-19 pandemic and associated policy responses; and the expectation that these uncertainties will not reverse or be resolved within a single valuation cycle, the special situation hurdle was triggered within the Valuation Policy and the Trustee executed on that process for private equity funds, in accordance with the Policy.

As at 30 June 2020 an upwards Trustee valuation adjustment based on a public market price adjustment factor was added to the investment manager valuations of unlisted International equity trusts ($193.1m) and unlisted Australian equity trusts ($4.2m), representing 5.0% and 0.3% of the unlisted International and Australian equity trust portfolios respectively. This followed a symmetrically-executed downward adjustment to private-equity valuations immediately following the steep falls in public equity markets in March 2020.

MILITARYSUPER NOTE 13. RELATED PARTIES

(a) Trustee

Commonwealth Superannuation Corporation (CSC) was the Trustee throughout the reporting period. No fees were charged by CSC for acting as Trustee or the Scheme during the reporting period.

(b) Key Management Personnel

The Directors of CSC throughout the year ended 30 June 2020 and to the date of this report were:

Ariane Barker

Patricia Cross (Chair)

Melissa Donnelly (Appointed 1 July 2020)

Christopher Ellison

Nadine Flood (Term ended 30 June 2020)

Winsome Hall (Term ended 30 June 2020)

Garry Hounsell

Sunil Kemppi (Resigned 22 November 2019)

Peggy O'Neal (Term ended 30 June 2020)

Anthony Needham

Margaret Staib

Michael Vertigan

Alistair Waters (Appointed 25 February 2020)

In addition to the Directors,the following Executives of CSC had authority and responsibility for planning, directing and controlling the activities of the Scheme throughout the year ended 30 June 2020 were:

Paul Abraham - Executive Manager, Investment Operations

Catharina Armitage - Head of People

Peter Carrigy-Ryan - Chief Executive Officer

Robert Firth - Chief Risk Officer (Previously Head of Risk until 2 December 2019)

Philip George - Special Advisor, Member Outcomes (Commenced 3 February 2020)

Peter Jamieson - Chief Customer Officer

Adam Nettheim - Head of Customer Operations (Previously Head of Scheme Operations until 4 November 2019)

Alana Scheiffers - General Counsel (Previously Head of Legal & Compliance until 6 September 2019)

Alison Tarditi - Chief Investment Officer

Andy Young - Chief Operating Officer

The following changes to the executives of CSC were made subsequent to 30 June 2020:

Peter Carrigy-Ryan - Chief Executive Officer (Retired 12 July 2020)

Philip George - Chief Transformation Officer (Previously Special Advisor, Member Outcomes until 31 July 2020)

Damian Hill - Chief Executive Officer (Commenced 13 July 2020)

Andrew Matuszczak - Executive Manager, Technology (Commenced 31 August 2020)

Anthony Needham and Alana Scheiffers are members of the Scheme. The terms and conditions of his membership, or those of any related parties, is the same as for any other member who is not part of the key management personnel of the the Scheme.

(c) Key Management Personnel Compensation

The aggregate compensation of the key management personnel is set out below:

2020

2019

$

$

Short-term employee benefits

528 158

535 659

Post-employment benefits

39 920

48 296

Other long-term benefits

(2 844)

11 852

Termination benefits

0

24 615

565 234

620 422

Aggregate compensation in relation to the Fund is a pro-rata apportionment of the overall compensation paid by the Trustee, based on the net assets of the entities under its trusteeship or actual control.

The compensation of key management personnel (including Directors) related to investment management is charged against the assets of the AIT that are referable to the Fund.

The Fund has not made, guaranteed or secured, directly or indirectly, any loans to key management personnel or their personally-related entities at any time during the year.

(d) Investing entities

Throughout the year ended 30 June 2020, the Fund's only investment has consisted of units in the AIT, which was established to provide a cost-effective means of gaining exposure to a broad range of listed and unlisted securities across various asset classes.

The other investors in the AIT throughout the year were the Commonwealth Superannuation Scheme, the Public Sector Superannuation Scheme, the Public Sector Superannuation Accumulation Plan and the Australian Defence Force Superannuation Scheme. All investing transactions are conducted under normal industry terms and conditions.

The Trustee of the Fund, Commonwealth Superannuation Corporation, is the trustee of the following regulated superannuation schemes: Commonwealth Superannuation Scheme, the Public Sector Superannuation Scheme, the Public Sector Superannuation Accumulation Plan, the Military Superannuation and Benefits Scheme and the Australian Defence Force Superannuation Scheme.

The Trustee pays costs of and incidental to the management of the Fund and the investment of its money from the assets of the AIT that are referable to the Fund (see Note 7(c)). No fees were charged for acting as Trustee during the year ended 30 June 2020 (2019: $nil).

The Fund held the following investments in related parties at 30 June:

Fair Value of Investment

Fair Value of Investment

Share of Net Income / (Loss) after tax

Share of Net Income / (Loss) after tax

2020

2019

2020

2019

$'000

$'000

$'000

$'000

ARIA Investments Trust

10 329 547

10 275 549

(90 004)

740 706

10 329 547

10 275 549

(90 004)

740 706

MILITARYSUPER NOTE 14. COMMITMENTS, CONTINGENT LIABILITIES AND CONTINGENT ASSETS

The Scheme had no capital or other expenditure commitments at 30 June 2020 (2019: $nil).

In the normal course of business, requests are made by members and former members for the review of decisions relating to benefit entitlements of the Scheme which could result in additional benefits becoming payable in the future. Each request is considered on its merits prior to any benefit becoming payable. In the opinion of the Trustee, these requests do not represent a material liability on the Scheme.

There were no other contingent liabilities or contingent assets for the Scheme at 30 June 2020 (2019: $nil).

MILITARYSUPER NOTE 15. SUBSEQUENT EVENTS

No matters have arisen since 30 June 2020 that have materially affected, or may materially affect, the operations of the Scheme, the results of those operations, or the financial position of the Scheme in future financial years.