TechWrap. February The months that were... Contents:

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1 TechWrap February 2010 The months that were... December and January have been reasonably quiet months on the technical front while the Federal parliament takes its long Christmas break. Contents: Cooper review preliminary report Social security changes Consumer credit regime news Offshore super trusts SMSF update Taxation update Government spending on super concessions Watch list December saw Penny Wong, and later the PM, head for Copenhagen without their climate change policy approved by the parliament. We saw at least one media analyst comment whether holding a climate change conference in snowy Copenhagen in December was such a great idea and that maybe a better location may have been somewhere hotter say Adelaide! The Henry review into taxation handed their report to the Government on December 23 rd but the Government has stated that they will not release this until they have had time to analyse and evaluate the report s recommendations. In January, during his national tour leading up to Australia Day, the PM made a speech warning Australia that "we cannot be complacent about our future" as the effects of our ageing population will bring major challenges. In doing so, he also announced that the Treasurer will release the third intergenerational report in early February. Tony Abbott, as the new leader of the Coalition, must have spent much of his Xmas break working on the Coalition climate change policy. He has advised that this will be released before parliament resumes for Welcome 2010 and lest we forget - an election year. Our parliamentarians resume sitting at 2pm on Tuesday 2 nd February.

2 Cooper review preliminary report Page 2 The Super System Review panel ( Cooper review ) released a preliminary report in relation to phase one of the review on 14 th December, new model for superannuation based on choice The preliminary report has been used as an opportunity for the Panel to start to outline key themes that are emerging in its work so far. There are very few finalised recommendations as the Panel recognises that its final view and recommendations on governance will not be determined until phases two and three of the review are complete. The Panel s final view on governance (ie. phase one) will form part of its final report due by 30 June The preliminary report: recommends a choice architecture model for superannuation which starts from a member, rather than a product or industry sector focus; includes preliminary responses to selected governance issues; and specifies governance issues raised that will not be pursued in the review Choice architecture model: The Panel have recommended a new model for superannuation based on whether or not a member has made a choice about their superannuation. This is based on their view that a one-size-fits-all approach is inequitable to members while the proposed model recognises the different needs of members with varying levels of engagement with their superannuation. The choice architecture model classifies members into four categories: disconnected, universal, choice and self-managed. A member who did not make an express choice would be placed in the universal category while an account belonging to a member who loses connection with the account would be transferred to the disconnected category. The Panel has also proposed that only funds in the universal category should be able to become a default fund. The diagram below shows the key features of super funds in each category of the model. Disconnected Universal Choice Self-managed... a one-size-fitsall approach is inequitable Investment strategy Governance Philosophy Ability to change option/fund Conservative Trustee-centric Single strategy (incl. lifecycle) Trustee-centric Less frequent Supermarket Disclosure-based More frequent Self-directed Self Insurance Death & TPD Member decision Reporting - Minimal Comprehensive Compliance based Product - Streamlined Comprehensive Disclosure perhaps on-line Statement only Source: Clearer super choices: matching governance solutions, phase one preliminary report, 14 December 2009.

3 Page 3 The Panel also believe that this model enables different governance and regulatory approaches to be taken based on the different types of members and will also facilitate a more precise allocation of costs to members.... a system that is more accountable to members The model accommodates movement between the categories, however certain regulations for members moving into a category with more choice (eg from being disconnected to moving to a choice fund) would be required to ensure the member has not inadvertently been pushed into a choice fund. The Panel have suggested the use of something similar to the suitability gates which are used in the UK by the Financial Services Authority. These would require an adviser to ensure: the product recommended meets the client s investment objectives; the client can bear the risks involved in the product; the client has the ability to understand the nature of the risks involved; the client s demands and needs are explicitly identified; there is a clear explanation as to why the product is suitable; and any potential disadvantages are clearly explained. The proposed model does not capture defined benefit funds and the Panel recommend that these plans should be subject to regulation tailored to their unique requirements. The Panel believe that the choice model will achieve:... a simpler and cheaper universal product clearer choices / boundaries - based on existing market sectors; a simpler and cheaper universal product for members; ability for members to choose and pay for a more tailored solution that suits them; and overall, a system that is more accountable to members. A full copy of the Phase One Preliminary Report, Clearer Super Choices: Matching Governance Solutions, is available at What s next: The closing date for submissions to the phase three issues paper on structure (including SMSFs) is 19 February Preliminary recommendations for phase two on operation and efficiency are due for release in March-April Did you know ASIC has published a media release urging consumers to prepare for 2010's financial turning points - Identifies common turning points in lives of many consumers & offers to help people make informed financial decisions. For more information:

4 Page 4 Social security changes Deeming exemptions ceased on 1 January 2010 The Minister for the Department of Families, Housing, Community Services & Indigenous Affairs no longer provides deeming exemptions for church and charitable investment products. These types of funds are operated by a church or a charitable organisation where investors can invest by deposits or loans. The funds generally operate to provide funding for capital works within Australia; building new facilities for organisations such as churches and schools....new investments made after 31 December 2009 will be subject to deeming The implications for current and new investors in these funds are outlined below: Investments that have been made into a fund prior to 1 January 2010: Their exemption will remain for investments existing at 31 December 2009, provided they continue to receive Centrelink benefits. Any actual return that they earn or receive must be declared for assessment under the income test. This includes interest or any benefit such as a discount in fees (i.e., valuable consideration). If a client ceases to receive Centrelink benefits for a period of time, the deeming exemption will not apply when they reapply for Centrelink benefits. Additional investments made after 31 December 2009 into a fund: If an investor increases their investment into the same fund, the additional amount will not receive a deeming exemption, but will be treated the same as other financial investments. The original amount invested will still be exempt from deeming. New investors after 31 December 2009: Any new investment will be subject to the deeming provisions. For more information on deeming exemptions refer to 0_1001en.rtf Family Tax Benefit Part A - new education requirements From January 2010, to be eligible for Family Tax Benefit Part A, any child aged 16 to 20 will have to be studying towards Year 12 or equivalent qualification, or have completed such a course. Exemptions apply where:... new full time study requirement for children aged 16 to 20 the young person lacks the capacity to study due to illness or impairment, there is no locally accessible course, or other special circumstances exist. Both Family Tax Benefit Part A for young people aged over 21, and Family Tax Benefit part B for young people aged 16 to 18, already have a full-time study requirement. For further information see: _ aspx

5 Page 5 Consumer Credit regime news... ASIC releases guides on National Credit regime ASIC released three documents at the beginning of December aimed at helping those affected by the National Consumer Credit regime. These documents provide information and guidance to those who engage or plan to engage in certain credit activities, including those providing advice on mortgages. The three documents are: Information Sheet 96: Getting ready for credit (INFO 96). This document explains how the national credit regime applies and what people can do to start getting ready it; Regulatory Guide 203: Do I need a credit licence? (RG 203). This guide is designed to help people who engage in credit activities understand whether they need to be licensed; and Regulatory Guide 202: Credit registration and transition (RG 202). This guide outlines the process for registering with ASIC and the transition from registration to licensing. Further details can be found on the ASIC website: ent Offshore super trusts The ATO has issued Taxpayer Alert 2009/19. The alert highlights two different arrangements involving offshore superannuation trusts that have been uncovered as part of Project Wickenby and are of concern to the ATO.... ATO concern over offshore superannuation trusts Both arrangements involve the setting up of a trust structure purported to be a superannuation fund in a tax haven, with the intention to transfer the money from the overseas trust into a complying Australian superannuation fund later down the track. By transferring assets at a later date they are substantially deferring the time at which such amounts are subject to tax in Australia. The arrangements also involve the use of a dummy or related party employer established in the tax haven with one of arrangements also involving an SMSF holding investments that may be in house assets.. In both cases, the individual while offshore will not pay tax in Australia on any income in the offshore trust fund under Australia s foreign source income attribution regime. A copy of the alert can be found at: 1

6 Page 6 SMSF update Extended process for rolling over to a SMSF The ATO is implementing changes to the Super Fund Lookup website. As a result of these changes, APRA have advised the superannuation funds it regulates that they need to expand their procedures when rolling over to newly created SMSFs. What are the changes? Currently trustees of complying superannuation funds must perform a number of compliance checks to ensure that they do not roll-over members benefits to a non-complying fund....longer process for rollovers to new SMSFs One of these checks is to refer to the ATO s super fund lookup website which previously advised whether a fund was complying or not. From 28 January 2010 the following changes apply: the ATO perform checks on new SMSFs before they are added to Super Fund Lookup. The ATO says these checks will take seven days. SMSFs will not be able to receive rollovers until the fund is listed as registered in Super Fund Lookup. any new SMSF will have the status registered status not confirmed when added to Super Fund Lookup. APRA have advised superannuation funds that it regulates to undertake additional checks before rolling over to an SMSF that has an unconfirmed status. How long before a new SMSF s status changes from registered status not confirmed This status will remain with new SMSFs for up to 18 months until the fund completes their first tax return. Why are the additional checks required? The additional checks are required to assist in preventing the illegal early release of superannuation money from the system. What does this mean for members of new SMSFs? This may mean that members of newly established SMSFs will: be required to provide additional information when transferring their benefits to their SMSF (specific processes including the type of additional information required may vary between superannuation funds); and need to wait until after their SMSF appears on the Super Fund Lookup website before rollovers to their SMSF are processed. Tax treatment of futures contracts in SMSF s The ATO has released an interpretive decision (ATO ID 2010/7) which states that where a SMSF buys and sells ASX Mini Index Futures Contracts, the tax treatment of gains and losses will be determined under the CGT provisions. SPAA specialist auditors approved to audit SMSFs A copy of ATO ID 2010/7 can be found on SMSF specialist auditors Each year, trustees of self managed superannuation funds are required to appoint an approved auditor to conduct a financial and compliance audit of the fund. Superannuation Regulations have been released allowing SMSF Professionals Association of Australia Limited (SPAA) SMSF Specialist Auditors to be approved auditors and undertake audits of SMSF s. You can find a SMSF specialist auditor at

7 Page 7 Taxation update Choice of super fund meeting your obligations The ATO has published a new document on their website to help employers meet their obligations under the choice of fund requirements. A copy of the document can be found at: Employee payslip requirements from 1 January 2010 From 1 January 2010 all employee payslips are required to include the employer s ABN.... from 1 January 2010 all payslips are required to have the employer s ABN on them As a reminder, employers who are required to pay superannuation contributions for their employee s benefit need to include the following superannuation information on payslips: the amount of each superannuation contribution made during the period to which the payslip relates, or the amounts of contributions that they are liable to make; and the name or the name and account number of the superannuation fund they made or will make superannuation contributions into. Note: Employers who contribute to a defined benefit interest of a defined benefit fund don t have to include these contributions in the payslip. For a full list of payslip requirements see: Rental properties claiming travel expenses deduction Generally, the cost of travel a person incurs to inspect or maintain rental properties or to collect rent is an allowable deduction. The ATO has released a document to explain the types of travel expenses that can be claimed and outline some common mistakes in relation to such claims. A copy of the document can be found at: Did you know a couple looking to achieve a comfortable retirement needs to spend $51,437 a year, while those seeking a modest retirement lifestyle need to spend $27,902 a year Source: Westpac ASFA Retirement Standard (21 December 2009) For more information:

8 Page 8 Government spending on super concessions... $8 billion drop in Government spending on super concessions expected for 2009/10 Treasury has released the 2009 Tax Expenditures Statement and this reveals that Government spending (revenue loss) on funded superannuation concessions: for 2007/08 was $30.3 billion for 2009/10 is expected to be $22.3 billion Why the $8 billion drop? $6.7 billion as a result of a decrease in concessional contributions (contributions cap reduction and Global Financial Crisis) $0.8 billion in reduced capital gains and therefore capital gains tax concessions (the 1/3 exemption concession) $0.2 billion as a result of reduced Government Co-contributions $0.2 billion credit offsetting expenses through the transfer of temporary residents' super to the Australian Government $0.1 billion other A full copy of the statement is available at Watch list 23 December 2009: The Government received the Australia's Future Tax System review (Henry review) report and has indicated that they " will consider the review and release it in early 2010, along with an initial response. 15 January 2010: The Australian Financial Centre Forum report was released and the Government is considering its recommendations along with those contained in the Henry review report. February 2010: The Treasurer will release the Third Intergenerational Report, entitled Australia to 2050: Future Challenges. 19 February 2010: This is the closing date for submissions to phase three of the Cooper review. FOR GENERAL INFORMATION ONLY This information has been prepared by BT Funds Management Ltd ABN It is provided solely for the general information of external financial advisers and must not be relied on as a substitute for legal, tax or other professional advice. Further, it must not be copied, used, reproduced or otherwise distributed or circulated to any retail client or other party. The information is given in good faith and has been derived from sources believed to be accurate at its issue date. However, it should not be considered a comprehensive statement on any matter nor relied upon as such. BT Funds Management Ltd (including its related entities, employees and directors) does not give any warranty of reliability or accuracy or accept any responsibility arising in any way including by reason of negligence for errors or omissions in the information.