ASFA VICTORIAN LEGISLATION DISCUSSION GROUP 22 MAY 2017 RECENT LEGISLATIVE AND REGULATORY DEVELOPMENTS IN SUPERANNUATION 27 APRIL MAY 2017

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1 ASFA VICTORIAN LEGISLATION DISCUSSION GROUP 22 MAY 2017 RECENT LEGISLATIVE AND REGULATORY DEVELOPMENTS IN SUPERANNUATION 27 APRIL MAY APRA AND ASIC UPDATES There were no APRA or ASIC updates during this period. 2. LEGISLATION 2.1 Exposure Draft: ASIC Supervisory Cost Recovery Levy Regulations 2017 (4 May 2017) Treasury has released exposure draft ASIC Supervisory Cost Recovery Levy Regulations 2017 (Cth) (Draft Regulations), for consultation. The Regulations detail the calculations of ASIC s cost recovery levies payable, pursuant to the requirements of the proposed ASIC Supervisory Cost Recovery Levy Act 2017 (Cth). The Draft Regulations apply either a flat or a graduated levy to entities in each industry subsector regulated by ASIC. Graduated (variable) levies have been prescribed for subsectors where ASIC s regulatory costs vary significantly across its regulated population. Some of the graduated levies will include a fixed minimum component and a variable component to apportion ASIC s regulatory costs. The fixed minimum amount imposed for all entities in the subsector will recover ASIC s actual direct and indirect costs of undertaking stakeholder engagement, policy advice, guidance, education and a portion of ASIC s capital allowance. These costs are generally more stable over time. The Draft Regulations propose that superannuation fund trustees will pay a minimum levy of $18,000. Trustees of superannuation funds that have more than $250 million in funds under management will also pay a variable component depending on their share of the total funds under management above the threshold for the financial year. ASIC will determine its regulatory costs and the total amount of funds under management above the threshold annually. Submissions are due by 26 May Exposure Draft: Treasury Laws Amendment (External Dispute Resolution) Bill 2017 (17 May 2017) Treasury released exposure draft Treasury Laws Amendment (External Dispute Resolution) Bill 2017 (Cth) and Treasury Laws Amendment (External Dispute Resolution) Regulations 2017 (Cth) (Draft AFCA Law), for consultation. The Draft AFCA Law will enable the Government to establish a one stop shop Australian Financial Complaints Authority (AFCA), effective from 1 July AFCA will be governed by a board comprising an independent chair and an equal number of directors with consumer and industry backgrounds, and will be regulated by ASIC. Financial services entities (such as superannuation fund trustees) will become members of AFCA and assist in funding the Authority. Changes to the Superannuation Complaints Tribunal The Draft AFCA Law will repeal the Superannuation (Resolution of Complaints) Act 1993 (Cth) (Complaints Act) and as a result, abolish the Superannuation Complaints Tribunal (SCT). Once the SCT is abolished, AFCA will assume responsibility for resolving superannuation complaints. However, the SCT will continue to operate until 1 July 2020 to resolve disputes lodged before 1 July 1

2 2018, and will remain funded through APRA s Financial Institutions Supervisory Levies. The EDR decision-maker will be provided with additional powers which are necessary for the resolution of superannuation complaints, as follows: power to join certain persons to a superannuation complaint; a power to obtain information and documents about a superannuation complaint; and a power to require attendance at a conciliation conference about a superannuation complaint. Meaning of superannuation complaint A superannuation complaint will be defined as a complaint that relates to any of the following: (f) (g) a decision of a trustee of a regulated superannuation fund or approved deposit fund in relation to a particular member or former member (including a decision of a trustee to admit a member to a life policy fund) which was unfair or unreasonable; a decision of an RSA provider in relation to a particular RSA holder or former RSA holder which was unfair or unreasonable; a decision of an insurer under an annuity policy which was unfair or unreasonable; a decision of an insurer in relation to a contract of insurance where the premiums are paid from an RSA, where the decision was unfair or unreasonable; the conduct of an insurer or a representative of an insurer in relation to the sale of an annuity policy which was unfair or unreasonable; the conduct of an RSA provider in relation to a particular RSA holder or former RSA holder which was unfair or unreasonable; or the conduct of an insurer or a representative of an insurer, in relation to the sale of insurance benefits where the premiums are paid from an RSA, which was unfair or unreasonable. Additional power to join certain persons to a superannuation complaint The EDR decision-maker will have the power to join certain people as parties to a superannuation complaint at any time, in order to ensure that the interests of all relevant parties are adequately represented during the complaint resolution process. These people include: a person who has applied to become a party to the complaint; an insurer; an RSA provider; and a person responsible for determining a disability However, these persons may only be joined in certain circumstances: a person can be joined if that person has applied to the EDR decision-maker to become a party to the complaint. The EDR decision-maker will generally take into account whether the person has a real interest in the outcome of the complaint before making a decision; an insurer can be joined to a complaint if the complaint relates to a death or disability benefit, or the complaint relates to admitting a person to membership of a life policy fund; 2

3 an RSA provider can be joined as a party to a superannuation complaint if the complaint relates to a death or disability benefit, under a contract of insurance where the premiums are paid from the RSA; or a person who is responsible for determining a disability can be joined as a party to a complaint if the complaint relates to a disability benefit and the EDR decision-maker decides that the person is responsible for determining either the existence or the extent of a disability (for example, whether the disability is total and permanent). Therefore, the EDR decision-maker will be able to review the decision of a member s superannuation fund trustee, the insurer and the medical practitioner in a TPD dispute, for example. If a decision is made to join a person as a party to a superannuation complaint, the EDR decisionmaker must give written notice of the decision, and the reasons for the decision, to the new party and all other existing parties to the complaint. Further, the joined party will be obliged to give information or produce documents that are relevant to the superannuation complaint. Additional power to obtain information and documents The EDR decision-maker will have the power to obtain certain information and documents that are relevant to a superannuation complaint. If a person refuses or fails to comply with a requirement in the written notice given by the EDR decision-maker, the person commits a strict liability offence and will be liable for a penalty of 30 penalty units, unless that person has a reasonable excuse. As an example, if a member makes a TPD claim due to a hip injury, playing sport, but the insurer claims the member had a pre-existing condition and already was not on full duties at work, the EDR decision-maker may seek information from the member s employer, if the circumstances require. Additional power to require attendance at conciliation conferences The EDR decision-maker will have the power to require people to attend conciliation conferences. This additional power is required because although members of the EDR scheme will be contractually obliged to participate in resolution of complaints, there may be third parties who are not EDR members (e.g. a medical practitioner or an insurer), who will not be contractually obliged to participate in the resolution of the superannuation complaint. If a person refuses to or fails to comply with a requirement to attend conciliation, the person will commit a strict liability offence and will be liable for a penalty amount of 30 penalty units, unless that person has a reasonable excuse. Reference of questions of law to the Federal Court The EDR decision-maker may seek the Federal Court s opinion about a question of law, either on its own initiative or at the request of a party to the complaint. Making a determination In making a determination, the EDR decision-maker will have all the powers, obligations and discretions conferred on the trustee, insurer, RSA provider or other decision-maker who made the original decision or engaged in conduct to which the superannuation complaint relates. This is consistent with the current position in the SCT. However, the EDR decision-maker may only make a determination which removes any unfairness or unreasonableness from the original decision or conduct. Any determination made by the EDR decision-maker must not contravene any law, or governing rules of a regulated superannuation or approved deposit fund or terms of a contract. 3

4 Decision maker to give reasons about a superannuation complaint Once an EDR decision-maker has made a determination relating to a complaint, the EDR decisionmaker must provide all parties to the complaint with his or her reasons for making the decision. Operation of a determination about a superannuation complaint A determination will come into operation immediately upon its making, unless the EDR decision-maker specifies another time. A determination which varies the decision of another person (for example, a trustee of a superannuation fund) or substitutes a decision for a decision of another person will be treated as if the decision of the EDR decision-maker was the decision of the trustee or original decision-maker. This is consistent with the position in the SCT. Appeals to the Federal Court Each party to a complaint will have the right to appeal a superannuation determination to the Federal Court on a question of law. This is consistent with the current position in the Complaints Act. Referring matters to ASIC and APRA The EDR decision-maker will be required to provide particulars to ASIC or APRA if he or she becomes aware that certain things happen in relation to a superannuation complaint. These things include: a contravention of any law; a contravention of the governing rules of a regulated superannuation fund or of an approved deposit fund; a breach in the terms and conditions relating to an annuity policy, a life policy or an RSA; or a refusal or failure by a party to a complaint to give effect to a determination made by an EDR decision-maker. If a superannuation complaint is settled between parties, the EDR decision-maker who hears the superannuation complaint may also give the particulars of the settlement to APRA, ASIC or the Commissioner of Taxation if he or she believes that the settlement requires further investigation by any of these agencies. Submissions are due by 14 June Crimes Amendment (Penalty Unit) Act 2017 (Cth) 3. CASES The Crimes Amendment (Penalty Unit) Act 2017 (Cth) received Royal Assent. The Bill increases the Commonwealth penalty unit from $180 to $210, from 1 July There were no cases of interest during this period. 4. OTHER RECENT DEVELOPMENTS 4.1 AASB 1056 Superannuation Entities Guidance (27 April 2017) Under Australian Accounting Standard AASB 1056 Superannuation Entities (AAS 1056), superannuation fund trustees will publish financial reports that clearly show the benefits members are entitled to, and whether the fund is likely to be able to pay those benefits. AAS 1056 will replace AAS 25 Financial Reporting by Superannuation Plans (AAS 25), in respect of annual reporting periods commencing on or after 1 July Financial reports will now clearly identify whether superannuation plans are fully funded and the 4

5 risks that the plan is exposed to. All member benefits will be recognised as liabilities, and member contributions recognised as increases or decreases in those liabilities. This more closely reflects the economics of the fund and makes the fund s overall position easier for members to understand. Guidance The Australian Accounting Standards Board (AASB) has released guidance in respect of the AAS, detailing the differences between AAS 1056 and AAS 25 in respect of: who has to apply AAS 1056; (f) member benefit liabilities, contributions and benefit payments; presentation of financial statements; asset and liability measurement; consolidation investment entity status; and employer-sponsor receivables. The AASB has also released the following FAQs: Do member benefits have to be presented as liabilities as done in the illustrative financial statements in AASB 1056, or could they also be presented as equity on the basis that the members are akin to shareholders of the fund? Is the format of the illustrative financial statements and note disclosures in AASB 1056 mandatory, or could alternative forms of presentation be acceptable? (f) (g) (h) AASB 1056 paragraph 32 requires disclosure of disaggregated information. Does this mean we have to disclose separate financial statements for each of our underlying plans and identify individual employer-sponsors? Is there a requirement to present three columns in the Statement of Financial Position or in the notes? Do I need to prepare a Statement of Changes in Equity if I have no reserves or unallocated profits/losses? In the Statement of Changes in Member Benefits, what are the disclosure requirements for fees which are fixed (monthly fees) vs fees which are included in the fund s unit price? Are all superannuation entities presumed to be investment entities, therefore able to fair value their investments in subsidiaries rather than consolidate them in accordance with AASB 10 Consolidated Financial Statements? How do you determine whether a superannuation entity acts in the capacity of an insurer or only as an agent for the insurer? 4.2 ATO Law Companion Guideline LCG 2017/1 Superannuation reform: capped defined benefit income streams pensions or annuities paid from non-commutable, life expectancy or market linked products (28 April 2017) The ATO released its finalised Law Companion Guideline LCG 2017/1 (Guideline), subsequent to comments provided to it by February The Guideline clarifies how the defined benefit income cap applies to the following capped defined benefit income streams (as listed in section of the Income Tax Assessment Act 1997 (Cth)) 5

6 that cannot be commuted in full or in part: life expectancy pension that is provided under rules that meet the standards of SIS Regulation 1.06(7); life expectancy annuity that is provided under a contract that meets the standards of SIS Regulation 1.05(9); market-linked pension that is provided under rules that meet the standards of SIS Regulation 1.06(8); and market-linked annuity an annuity for the purposes that is provided under a contract that meets the standards of SIS Regulation 1.05(10). As with other types of superannuation income streams, the value of capped defined benefit income streams count towards a member s transfer balance cap. Because capped defined benefit income streams generally cannot be commuted and cashed as a lump sum, modifications result in certain amounts being included in assessable income and adjustments to the availability of tax offsets. The following modifications apply for capped defined benefit income streams: the application of a statutory formula to work out the value of a member s superannuation interest that supports a capped defined benefit income stream (Special Value). The Special Value gives rise to a credit in a member s transfer balance account; and the defined benefit income cap, which affects the defined benefit income that is included in the member s assessable income. It also limits the tax offset available in respect of the untaxed element of certain benefits that are defined benefit income. Special Value The Special Value is calculated by multiplying the annual entitlement by the product s remaining term. The annual entitlement is worked out by annualising the first superannuation income stream benefit a member is entitled to receive from the income stream across a year. The annual entitlement amount will correspond to the amount required to be paid during the year in accordance with the agreement under which the life expectancy or market linked product is provided and the relevant regulatory provisions. The first superannuation income stream benefit a member is entitled to receive comprises all of its constituent components (for example, all of its tax free component, and taxable component (taxed elements and/or untaxed elements)). The remaining term is the number of years remaining in the period throughout which superannuation income stream benefits are payable under a product (rounded up to the next whole number). The Special Value will be a credit in a member s transfer balance account on the date a superannuation income stream benefit from the superannuation income stream first becomes payable, where this date occurs on or after 1 July However, if a pension or annuity from a life expectancy or market linked product is payable prior to 1 July 2017, the credit that arises in a member s transfer balance account is equal to the Special Value of the superannuation interest that supports that income stream just before 1 July 2017 (being the end of 30 June 2017). The credit arises in the member s transfer balance account on 1 July The Special Value will be calculated based on the first superannuation income stream benefit that a member is entitled to receive on or after 1 July

7 Excess transfer balance If a capped defined benefit income stream is payable, then a member will only have excess transfer balance if the balance in the transfer balance account exceeds both the member s transfer balance cap and capped defined benefit balance. A member s capped defined benefit balance is the net sum of the transfer balance credits and debits in a member s transfer balance account for capped defined benefit income streams. If a member only has a capped defined benefit income stream, the transfer balance in the member s transfer balance account can never exceed the member s capped defined benefit balance. A member will therefore not have an excess transfer balance regardless of whether the Special Value. A member may have both a capped defined benefit income stream and another type of superannuation income stream (for example, an account-based pension). That member may exceed both the transfer balance cap and capped defined benefit balance. If this applies, either a full or partial commutation of the other superannuation income stream is required. At the time the Commissioner issues the notice, a debit arises in the member s transfer balance account equal to the amount of the excess transfer balance stated in the notice. In this way, the member will cease to have excess transfer balance in his or her transfer balance account. Defined benefit income cap The defined benefit income cap is relevant where a member is either: 60 years of age or over; or under 60 years of age and a death benefits dependant, where the deceased dies at 60 years of age or over. Defined benefit income cap threshold A member s defined benefit income cap is the general transfer balance cap for the financial year divided by 16. For example, as the general transfer balance cap for the 2018 Financial Year is $1.6 million, the defined benefit income cap is $100,000. However, a member s defined benefit income cap is reduced where the member first became entitled to concessional tax treatment part way through a financial year, or the member received defined benefit income that is not subject to concessional tax treatment. Reduction where some defined benefit income is not subject to concessional tax treatment The defined benefit income cap is also reduced by the defined benefit income that is not subject to concessional tax treatment where a member receives both of the following types of defined benefit income during a financial year: defined benefit income that is subject to concessional tax treatment; and defined benefit income that is not subject to concessional tax treatment. Consequences of exceeding the defined benefit income cap If a member exceeds his or her defined benefit income cap: additional amounts of defined benefit income that would otherwise be non-assessable, nonexempt income, may be included in a member s assessable income; and/or the tax offsets otherwise available to a member, in respect of any untaxed element of your 7

8 defined benefit income, may be reduced. Additional assessable income Where the sum of the tax free component and taxed element of benefits that are defined benefit income and non-assessable, non-exempt income exceeds a member s defined benefit income cap, 50% of the excess is assessable income (to which no tax offset applies). Reduced tax offset Where: a member is entitled to tax offset(s) in respect of the untaxed element of a defined benefit income stream; and the sum of the non-assessable, non-exempt income amounts and the assessable amounts exceeds a member s defined benefit income cap for a financial year, the sum of those tax offsets for the year is reduced by 10% of that excess. 4.3 Superbad Wage theft and non-compliance of the Superannuation Guarantee (2 May 2017) The Senate Economics References Committee released its report (Report), in response to its deep concern that analysis by Industry Super Australia indicated that employers failed to pay an aggregate amount of $5.6 billion in superannuation guarantee (SG) contributions in the 2014 Financial Year. The Report contains 32 recommendations, as follows: (f) (g) (h) in the interests of better informing the debate on the current state of the SG system, the Minister for Revenue and Financial Services publicly release the interim and final reports of the multi-agency working group on SG non-compliance, as well as the 2016 review by the Inspector-General of Taxation as soon as is practicable; the ATO prioritises its work on calculating and publishing an accurate, reliable estimate of the SG gap. Additionally, the ATO commits to publishing the SG gap annually in order for progress to be tracked over time; the Government strongly considers introducing amendments to the Superannuation Guarantee (Administration) Act 1992 (Cth) (SGA Act) to remove the $450 monthly threshold on SG eligibility; the Government introduce amendments to the SGA Act to ensure that an employee s voluntary salary sacrificed superannuation contributions cannot count towards the employer s compulsory SG obligation, nor reduce the Ordinary Time Earnings base upon which SG is calculated; the Government strongly considers introducing amendments to the SGA Act to require SG to be paid at least monthly, and preferably in alignment with regular pay cycles; the Government investigates options to extend the ATO s current private binding advice and administratively binding advice frameworks to make them available to workers as well as businesses; the Government reviews the definition of Ordinary Time Earnings for the purposes of SG obligation calculations and undertake an examination on the wider implications of any potential changes; the Government considers further initiatives that will assist small business employers in 8

9 managing their cash flow responsibly in order to provide them the best possible chance of fulfilling their SG obligations; (i) (j) (k) (l) (m) (n) (o) (p) (q) (r) (s) (t) (u) (v) the Government considers amending the SGA Act to extend liabilities of unpaid SG to corporate entities, similar to the expanded accessorial liability provisions for franchisors and holding companies in relation to unpaid wages, as proposed in the Fair Work Amendment (Protecting Vulnerable Workers) Bill 2017; the ATO continues to improve its communication process with individuals to keep them promptly and meaningfully informed of the progress of their employee notification; before entering into a payment plan to recover SG from a non-compliant employer, the ATO be required to notify the affected employee and gain their consent to the course of action; the ATO gives consideration to more proactive SG initiatives, such as the options put forward by the Inspector-General of Taxation to incorporate random audits into its SG compliance activities; the Government reviews ATO resource levels to ensure that the agency is well-equipped to undertake effective and comprehensive compliance activities to combat SG non-payment; the Government considers a legislated option for employees, or third parties acting on their behalf, such as unions or superannuation funds, to take private legal action in the relevant courts against their employers for unpaid SG; superannuation funds seeking default status in industry awards be required to have a rigorous arrears collection process in place; the Government reviews the superannuation guarantee charge (SGC) regime and its management by the ATO to ascertain whether it is adequate, with a view to increasing penalties for deliberate and repeated acts of non-compliance by employers; the ATO reviews all current compliance and recovery activities related to unpaid SG to determine which ones should remain with the ATO, and which ones could be transferred to, or shared with, the Fair Work Ombudsman. As a starting point, the Fair Work Ombudsman could begin to receive and act on SG non-payment complaints where appropriate, rather than simply referring the affected employees to the ATO; the Government considers increasing the resource levels of the Fair Work Ombudsman to ensure it is properly equipped to carry out any additional SG compliance or recovery activities it may acquire from the ATO; the Government investigates potential legislative amendments to strengthen the ATO s current ability to recover SGC liabilities through the Director Penalty Notice framework in order to stop company directors undertaking fraudulent phoenix activity and avoiding their SG obligations; the Government considers implementing a Director Identification Number scheme to prevent individuals engaging in illegal phoenix activity and repeatedly avoiding SG obligations; the Government consider amending the Corporations Act to ensure that the priorities in section 556 apply during all liquidations, regardless of whether the business being liquidated was operated through a trust structure; the Government considers amending the SGA Act so that nominal interest on SGC in the case of insolvencies apply up to the date of liquidation, in alignment with other creditors as set out in the Corporations Act; 9

10 (w) (x) (y) (z) (aa) (bb) (cc) (dd) (ee) (ff) the Government considers amending the SGA Act to allow insolvency practitioners to pay outstanding SG contributions directly to an employee s superannuation fund; the relevant Government agencies undertake further research into the fiscal and legislative impacts of an expansion of the current Fair Entitlements Guarantee scheme to cover unpaid SG entitlements; the Government revises the information that APRA regulated superannuation funds must include in Member Contribution Statements (given to the ATO) to include a breakdown of each category of superannuation payment an employee has received, as well as the employer it was received from; the ATO and ASIC reviews their data sharing arrangements to ensure that information on insolvency cases is being referred in a timely manner from ASIC to the ATO; the ATO and ASIC works together to collect data on abandoned companies to produce a comprehensive picture on the levels of unpaid SG contributions left by such companies; the ATO and Fair Work Ombudsman review their memorandum of understanding to consider whether more frequent information exchanges would improve their SG compliance activities; the ATO and ASIC increase their formal cooperation with superannuation funds to coordinate measures around early detection of non-payment of superannuation guarantee; privacy provisions which may inhibit information flows between the ATO and APRA regulated superannuation funds be reviewed and that the ATO seek advice from the Office of the Australian Information Commissioner as to the extent to which protection of public revenue exemptions in the Australian Privacy Principles might facilitate improved information sharing; the Government strongly considers expanding Single Touch Payroll (STP) to all businesses, with equal consideration given to how small businesses could be best supported in adopting the initiative. The committee recommends that Single Touch Payroll apply to all employees and contractors on an employer s payroll. The committee also recommends that the Government give consideration to whether STP should require both the reporting and payment of tax and superannuation obligations; and the Fair Work Regulations 2009 be amended to require: (i) (ii) (iii) (iv) the amount of earnings that the SG is calculated on; any voluntary superannuation contributions due; compulsory SG due; and all amounts of superannuation (both voluntary and compulsory) paid into an employee s superannuation fund (rather than just the amounts accrued). 4.4 Insurance in Superannuation Working Group discussion paper Member communication and engagement (5 May 2017) The Insurance in Superannuation Working Group has released its third discussion paper, Member communication and engagement (Discussion Paper), as part of its steps towards developing a Life Insurance Code of Practice for superannuation trustees. The Discussion Paper outlines options to improve member engagement and understanding of their insurance arrangements within superannuation. Some practical options are proposed to help bring these aspirations to life including use of standardised consumer language and terms across the industry, in order to reduce confusion. 10

11 The proposals outlined in the Discussion Paper have been developed with the objectives of: improving understanding of insurance by members through the use of consistent plain language and terminology; increasing financial literacy in relation to life insurance to help enable better choices, which could include funds using behavioural economics and undertaking consumer testing; delivery of more timely, targeted and relevant communication to members to ensure members have sufficient information to make informed insurance decisions when they need it; and providing easy access to insurance information, online resources, tools and education to facilitate member understanding of their insurance, their ability to alter or opt-out of their insurance cover and awareness of potential insurance cover limitations. Submission are due by 2 June Productivity Commission: Competition in the Australian Financial System (8 May 2017) The Treasurer has requested that the Productivity Commission (Commission) undertake an inquiry into competition in Australia s financial system. Scope of the Inquiry The Commission is to review competition in Australia s financial system with a view to improving consumer outcomes, the productivity and international competitiveness of the financial system and economy more broadly, and supporting ongoing financial system innovation, while balancing financial stability objectives. Without limiting related matters on which the Commission may report, its report to the Government should: consider the level of contestability and concentration in key segments of the financial system (including the degree of vertical and horizontal integration, and the related business models of major firms), and its implications for competition and consumer outcomes; examine the degree and nature of competition in the provision of personal deposit accounts and mortgages for households and of credit and financial services for small and medium sized enterprises; compare the competitiveness and productivity of Australia s financial system, and consequent consumer outcomes, with that of comparable countries; examine barriers to and enablers of innovation and competition in the system, including policy and regulation; and prioritise any potential policy changes with reference to existing pro-competition policies to which the Government is already committed or considering in light of other inquiries. The Commission should have regard to the Government s existing wide-ranging financial system reform agenda and its aims to: strengthen the resilience of the financial system; improve the efficiency of the superannuation system; stimulate innovation in the financial system; 11

12 support consumers of financial products being treated fairly; and strengthen regulator capabilities and accountability. Process The Commission will commence the inquiry on 1 July 2017, and the final report should be provided to the Government within 12 months of commencement. 4.6 ATO Law Companion Guideline LCG 2017/3 Superannuation reform: Superannuation death benefits and the transfer balance cap (8 May 2017) The ATO released its finalised Law Companion Guideline LCG 2017/3 (Guideline), subsequent to comments provided to it by March The Guideline provides guidance on the tax and regulatory treatment of superannuation death benefits and the treatment of death benefit income streams under the transfer balance cap provisions. However it does not cover modifications that apply for child recipients of death benefit income streams. Transfer balance credit that arises for a reversionary and non-reversionary death benefit income stream The Guideline states: reversionary beneficiaries will receive a transfer balance credit in their transfer balance accounts either: (i) for death benefit income streams commencing before 1 July 2017: the later of 1 July 2017 or the last day of the period of 12 months beginning on the day the death benefit income stream first became payable; and (ii) for death benefit income streams commencing on or after 1 July 2017: at the end of the period of 12 months beginning on the day the reversionary income stream became payable (Starting Day). A 12 month delay is provided in order to provide reversionary beneficiaries sufficient time to adjust their superannuation affairs before any consequences, such as a breach of their transfer balance cap, takes effect; beneficiaries in receipt of a reversionary capped defined benefit income stream should note that though there may be a 12 month delay when the credit arises in their transfer balance accounts, this does not mean that the income tax consequence of receiving defined benefit income is also delayed; recipients of a non-reversionary death benefit income stream will have a transfer balance credit arise in their transfer balance account on the later of 1 July 2017, or when they start to be the recipient of the death benefit income stream; and the transfer balance credit that arises in a beneficiary s transfer balance account is equal to the value of the superannuation interest that supports the death benefit income stream: (i) (ii) for death benefit income streams commencing before 1 July 2017: the value just before 1 July 2017; and for death benefit income streams commencing on or after 1 July 2017 the value on the Starting Day. 12

13 4.7 Federal Budget (9 May 2017) For the first time in a long while, the 9 May 2017 Federal Budget has not announced major superannuation measures. However, there are some modifications that will impact superannuation trustees, members and financial services providers, as follows: Successor Fund Transfer tax relief extended Government will extend the current tax relief for merging superannuation funds until 1 July 2020, in order to enable a trustee to transfer capital and revenue losses to a new merged fund, and to defer taxation consequences on gains and losses from revenue and capital assets. Mills Oakley commentary Given APRA s focus on superannuation fund mergers, this measure makes perfect sense. Superannuation fund non-arm s length income rules The Government will amend the non-arm s length income provisions for superannuation funds, from 1 July These rules are contained in section of the Income Tax Assessment Act 1997 (Cth). This measure will ensure expenses that would normally apply in a commercial transaction are included when considering whether the transaction is on a commercial basis. A superannuation fund s non-arm s length income is taxed at 47%. Superannuation borrowings - LRBA rules Superannuation fund limited recourse borrowing arrangements (LRBA) will be included in a member s total superannuation balance for the purposes of the $1.6m superannuation transfer balance cap from 1 July This measure has been introduced on the basis that an LRBA can be used to circumvent contribution caps and effectively transfer growth in assets from the accumulation phase to the retirement phase without triggering the superannuation transfer balance cap. Mills Oakley commentary This measure provides a degree of equality amongst APRA-regulated, Government, and self-managed superannuation funds (SMSF), given that SMSFs are best placed to take advantage of LRBAs. This measure is also likely to be intended to have a flow-on effect to housing affordability, given that LRBAs are often used to acquire real property. Proceeds from downsizing can be contribution as non-concessional contributions From 1 July 2018, individuals aged 65 and older will be able to make a non-concessional contribution of up to $300,000 using proceeds from the sale of a principal residence held for at least 10 years, in addition to any other non-concessional contributions they are permitted to make. Both members of a couple may take advantage of this measure to collectively contribute up to $600,000. These contributions will be exempt from the SIS Regulation 7.04 age and work tests, and will not be counted as part of the superannuation transfer balance cap. However, the proceeds from downsizing a home in this manner are not proposed to be exempt from the Age Pension Assets Test. Mills Oakley commentary This is clearly a tasty carrot intended to have a flow-on effect to housing affordability. 13

14 However, members wishing to take advantage of this measure will need to consider the value of their superannuation transfer balance caps, if they are seeking to downsize prior to retirement (as well as the impact of any proceeds of sale on the Age Pension Assets Test. Superannuation and housing affordability From 1 July 2017, first home buyers can make voluntary (salary sacrifice) contributions of up to $15,000 per year and $30,000 in total (subject to the concessional contributions caps), to their superannuation account in order to purchase a first home. These contributions, which are taxed at 15%, along with deemed earnings, can be withdrawn for a deposit. Withdrawals will be taxed at marginal tax rates less a 30% offset and allowed from 1 July Mills Oakley commentary This Scheme will have a familiar sounding name: First Home Super Saver Scheme This measure is clearly intended to address housing affordability. However, this measure will require the law to change in order to enable superannuation funds to offer an additional condition of release to certain superannuation fund members (along with the presumably, administrative burden of trustees ensuring that they release funds to first home buyers, only). One consequence of this measure is likely to be that a fund that offers this condition of release will unlikely be able to be listed as a Recognised Overseas Pension Scheme (ROPS, but previously known as QROPS), given the stringent preservation rules required of any fund listed as a ROPS. Additionally, it is likely that the First Home Super Saver Scheme may be difficult for some funds to implement and administer. (f) An enhanced regulatory sandbox The Government is introducing a world-leading legislative financial services regulatory sandbox to enable new and innovative FinTech products and services to be tested in Australia. The Government will legislate an enhanced regulatory sandbox (for a 24 month period) that allows more businesses to test a wider range of new financial products and services without a licence, including providing more holistic financial advice, issuing consumer credit, offering short term deposit or payment products, and operating a crowd sourced equity funding intermediary. Robust consumer protections and disclosure requirements will be in place to protect customers including responsible lending obligations, best interest duty, and the need for adequate compensation and dispute resolution arrangements. (g) Productivity Commission Review The Government has tasked the Productivity Commission to commence a review of the state of competition in the financial system, on 1 July The Productivity Commission is to review competition with a view to improving consumer outcomes, the productivity and international competitiveness of the financial system and economy more broadly, and supporting ongoing financial system innovation, while balancing financial stability objectives. The Productivity Commission will have 12 months to report to Government. (h) Government response to the Ramsay Review In response to the Ramsay Review, the Government will establish the Australian Financial 14

15 Complaints Authority (AFCA) as a single EDR body for all financial disputes to replace the existing Financial Ombudsman Service, Credit and Investments Ombudsman, and Superannuation Complaints Tribunal. AFCA will be established by 1 July Australian Financial Services Licensees will be required to be members of AFCA, and its decisions will be binding. AFCA will hear individual consumer/investor and small business disputes of higher values than are currently permitted under the existing three schemes, and those who are found to have wrongfully suffered losses will have access to more appropriate levels of compensation. 4.8 Reforms to address corporate misuse of the FEG scheme (17 May 2017) Treasury released a Consultation Paper (Consultation Paper) to address the growing costs of the Fair Entitlements Guarantee scheme (FEG) and ensure that it remains viable. Under FEG, the Government provides financial assistance for certain unpaid employee entitlements to eligible employees who have lost their jobs due to the insolvency of their employers. It is a scheme of last resort to support redundant workers. FEG provides financial assistance (by way of an advance) to cover five basic employment entitlements for redundant employees being: unpaid wages (up to 13 weeks); annual leave; long service leave; payment in lieu of notice (up to five weeks); and redundancy pay (up to four weeks per full year of service). One proposal, contained in the Consultation Paper is that, in order to enhance recovery, the employer liability provisions under section 596AC of the Corporations Act (which essentially makes a person, who enters into transactions to avoid paying or enabling the recovery of employee entitlements, liable to pay compensation) could be amended so that the following entities could bring an action for suspected breach of section 596AC as long as the liquidator did not intend to bring that action: the Department of Employment, when FEG has been paid; the Fair Work Ombudsman, for matters which were being investigated after which the employer was put into liquidation; and the Australian Taxation Office, where the reduced or avoided entitlements included superannuation guarantee amounts. Submissions are due by June

16 4.9 Future of Financial Advice Post Implementation Review (19 May 2017) Treasury has released a Consultation Paper prepared as part of a Post Implementation Review in relation to the following measures enacted as part of the FOFA reforms. the ban on up-front and trailing commissions and like payments for both individual and group risk insurance within superannuation; the requirement for advisers to renew client agreement to ongoing advice fees every two years (opt-in regime); the ban on soft dollar benefits over $300 per benefit; the limited carve-out for basic products from the ban on certain conflicted remuneration structures and best interests duty; and the clarification provided in relation to access to scaled financial advice. Submissions are due by 9 June Luke Hooper Special Counsel T: E: lhooper@millsoakley.com.au 16