MOving Ahead February 2017

Transcription

1 MOving Ahead February 2017 Prepared by Luke Hooper In this edition... APRA writes to all APRA-regulated entities advising that Prudential Standard CPS 226 Margining and risk mitigation for non-centrally cleared derivatives will commence on 1 March 2017; ASIC reminds trustees of the requirement to publicly disclose transparency information in respect of any standard employer-sponsored sub-plan, from 1 July 2017; Amendments to the Departing Australia Superannuation Payments Tax, the level of education, training and ethical standards of financial advisers, the value of Commonwealth penalty units, and delays to the commencement of SIS, section 29QC have been enacted; the Government releases a proposal paper in respect of the Financial System Inquiry Report s recommendations to create new accountability obligations for entities that issue or distribute financial products and to strengthen consumer protection by introducing financial product intervention powers; the ATO releases draft guidelines in response to the Treasury Laws Amendment (Fair and Sustainable Superannuation) Act 2016; and the Former Governor of the Reserve Bank of Australia, Bernie Fraser, releases his report in response to the Government s proposals to require the trustee boards of superannuation funds to have at least one-third independent directors, including an independent Chair. 1. APRA AND ASIC UPDATES 1.1 ASIC extends time for fees and costs disclosure (29 November 2016) ASIC extended the ASIC Class Order [CO 14/1252] start date enabling the fee and costs calculation and disclosure transition period to end on 30 September 2017, provided that issuers formally notify ASIC by 31 January 2017 that they intend to take advantage of this extension, and provide ASIC with information about the fees and costs that would be required to be included in this PDS had they complied with the updated fees and costs disclosure requirements, before 1 March If an issuer fails to meet these requirements, the Class Order will still take effect from 1 February ASIC has further stated that this extension date is final. ASIC has extended the transition period in response to applications from industry associations which had raised concerns that information provided for some products by an earlier date may not be reliable and may not assist consumers in comparing fees and costs. ASIC has also published instructions and the forms required to provide ASIC with the above information by issuers seeking to take advantage of the extension. 1.2 APRA letter: Margining and Risk Mitigation for Non-Centrally Cleared Derivatives (6 December 2017) APRA wrote to all APRA-regulated entities advising that Prudential Standard CPS 226 Margining and risk mitigation for non-centrally cleared derivatives (CPS 226) will commence on 1 March 2017, subject to the following: in relation to the requirements to exchange variation margin, CPS 226 incorporates a six- 1

2 month transition period (i.e. until 1 September 2017) during which APRA-regulated entities may finalise their implementation and transition to full compliance. During the transition period, APRA expects these entities to comply with the margin requirements on a best endeavours basis and on-board counterparties in a risk-focused manner. All qualifying transactions entered into from the official commencement date of 1 March 2017 are considered new transactions that are in-scope for the variation margin requirements under CPS 226, and an APRA covered entity must be in full compliance with the variation margin requirements in CPS 226 for all in-scope transactions by 1 September 2017, following the conclusion of the transition period; requirements for the post and collection of initial margin will be subject to a phase-in timetable that is broadly equivalent to the international timetable; and the risk mitigation requirements in CPS 226 will take effect from 1 March Additionally, APRA has updated CPS 226 by incorporating the above implementation arrangements and also making: minor changes to the Application and Authority sections that do not affect the operation of CPS 226; and clarification to the operation of references to external material in: (i) paragraph 8 (terms that are defined in APRA Prudential Standard APS 001 Definitions, APRA Prudential Standard GPS 001 Definitions or APRA Prudential Standard LPS 001 Definitions); (iii) (iv) subparagraph 9 (March 2015 paper by the Basel Committee on Banking Supervision and the Board of the International Organization of Securities Commissions (IOSCO), Margin requirements for non-centrally cleared derivatives); subparagraph 9(l) (January 2015 paper by the Board of IOSCO, Risk Mitigation Standards for Non-centrally Cleared OTC Derivatives); and subparagraph 9(n) (Australian Accounting Standard AASB 10 Consolidated Financial Statements). These changes are intended to provide legal certainty about whether the reference is to the materials as they exist from time to time or at a particular time, and do not represent a change in policy. 1.3 ASIC fees and costs (20 December 2016) ASIC updated its website to provide a form and instructions in respect of information that must be provided to it before 1 March 2017 by trustees seeking to take advantage of the extension of ASIC Class Order [CO 14/1252] until 30 September Superannuation funds to start disclosing sub-plan information from 1 July 2017 (19 January 2017) ASIC has reminded trustees of the requirement to publicly disclose transparency information, as required under SIS section 29QB and SIS Regulation 2.38, in respect of any standard employersponsored sub-plan, from 1 July The requirement to report this information follows the 30 June 2017 expiry of transitional interim relief under ASIC Class Order [CO 14/509]. As of 1 July 2017, trustees of superannuation funds that include a standard employer-sponsored subplan must disclose the following: a current version of the trust deed and any material not incorporated in that current version; 2

3 (e) (f) the governing rules; the most recent actuarial report for each defined benefit fund; the most recent product disclosure statement for each superannuation product offered by the entity; the previous financial year s annual report; and a summary of each significant event or material change notice made to members within the previous 2 years. However, trustees can still redact information that is personal to a beneficiary or former beneficiary of the fund. 1.5 APRA Prudential Standard SPS 310 Audit and Related Matters - Approved Form (21 February 2017) APRA has issued its Approved Audit Report Form, effective for reporting periods ending on or after 15 December 2016, taking into account new auditing requirements under Auditing Standard ASA 700 (Forming an Opinion and Reporting), as well as adopting requirements under AASB 1056 (Superannuation Entities), ASAE 3100 (Compliance engagements) ASAE 3150 (Assurance engagements on controls). Completion of the Approved Audit Report Form is required under APRA Prudential Standard SPS 310 Audit and Related Matters. 2. LEGISLATION 2.1 Treasury Laws Amendment (Fair and Sustainable Superannuation) Act 2016 (Cth) (29 November 2016) The Treasury Laws Amendment (Fair and Sustainable Superannuation) Act 2016 (Cth) received royal assent and has the effect of: imposing a $1.6 million transfer balance cap on the value of assets that can be transferred to the retirement phase; introducing additional taxation on defined benefit income streams in excess of $100,000 per annum; reducing the annual concessional contributions cap to $25,000; reducing the Division 293 taxation threshold from $300,000 to $250,000; (e) (f) (g) (h) (i) amending how concessional contributions are determined to ensure that constitutionally protected and unfunded defined benefit superannuation funds are treated the same when determining whether an individual has exceeded the concessional contributions cap; reducing the annual and three-year bring forward non-concessional contributions cap from $180,000 to $100,000 (and $540,000 to $300,000); amending the Superannuation (Government Co-contribution for Low Income Earners) Act 2003 to enable eligible low income earners to receive the low income superannuation tax offset; removing the 10% rule for personal deductible contributions; allowing individuals to make additional concessional superannuation contributions in a financial year by utilising unused concessional contribution cap amounts from up to five previous financial years, providing that the individual s total superannuation balance just 3

4 (j) (k) (l) (m) (n) before the start of the financial year is less than $500,000; increasing the amount of income an individual s spouse can earn before the individual ceases to be entitled to a tax offset for making superannuation contributions on behalf of their spouse; amending the earnings tax exemptions for superannuation funds in order to: (i) (iii) extend the earnings tax exemption to new lifetime products such as deferred products and group self-annuities; remove the earnings tax exemption in respect of transition to retirement income streams; and introduce an integrity measure that will apply to SMSFs and small APRA funds to support the operation of the transfer balance cap measure; removing the income tax deduction available to a superannuation fund that makes an antidetriment payment; simplifying and consolidating the range of existing processes for the release of superannuation using a release authority; and streamlining the administration of the Division 293 tax regime. The majority of these changes are due to take effect as of 1 July Superannuation (Excess Transfer Balance Tax) Imposition Act 2016 (Cth) (29 November 2016) The Superannuation (Excess Transfer Balance Tax) Imposition Act 2016 (Cth) received royal assent and has the effect of imposing the following amounts of excess transfer balance tax: 15% of a person s notional earnings for the excess transfer balance period; or 30% of a person s notional earnings for the excess transfer balance period if the person has previously been liable to pay excess transfer balance tax for an excess transfer balance period starting on or after 1 July Superannuation (Departing Australia Superannuation Payments Tax) Amendment Act (No. 2) 2016 (Cth) (2 December 2016) The Act amends the rate of departing Australia superannuation payments tax to 65% for the element taxed in the fund of the taxable component, for the element untaxed in the fund of the taxable component and for the element of a roll-over that is not an excess untaxed roll-over amount, effective 1 July ASIC Corporations (Amendment) Instrument 2016/1090 (Registered 7 December 2016) The Legislative Instrument amends ASIC Corporations (Generic Calculators) Instrument 2016/207 by deferring the commencement of the requirement for a generic financial calculator relating to superannuation and retirement to include the present value of future receipts and payments using an assumed rate of inflation of 2.5% until 1 July 2018, provided that the person: takes reasonable steps to ensure that the calculator displays to the user in the ordinary course of its use; or has printed on it a clear and prominent statement specifying whether or not the estimate takes into account an assumed change in the cost of living between the time of the preparation of the estimate and the future time. 4

5 2.5 Draft Superannuation (Objective) Regulation 2016 and Treasury Laws Amendment (Fair and Sustainable Superannuation) Regulations 2017 (16 December 2016) The Government released a further tranche of draft regulations and associated explanatory material relating to the superannuation reform package, for public consultation. The draft regulations relate to: (e) (f) prescribing the subsidiary objectives of the superannuation system; defining total superannuation balances; release authorities; lowering the annual non-concessional cap; improving access to tax deductions for personal contributions; and implementing the transfer balance cap. This release follows the passage of the Treasury Law Amendment (Fair and Sustainable Superannuation) Act 2016 (Cth) and the Superannuation (Excess Transfer Balance Tax) Imposition Act 2016 (Cth) on 23 November Submissions closed on 10 February ASIC Superannuation (Amendment) Instrument 2016/1232 (registered 19 December 2016) ASIC Superannuation (Amendment) Instrument 2016/1232 amended ASIC Class Order [CO 14/541] so that the date by which trustees must comply with SIS, section 29QC will now be 1 January Superannuation (Objective) Bill The Senate Economics Legislation Committee (14 February 2017) The Senate Economics Legislation Committee has made the following recommendations in respect of the proposed Superannuation (Objective) Bill 2016: the compliance of future superannuation reforms with the legislated objective should be periodically assessed and reported on as part of the Intergenerational Report (which is required to be prepared at least every five years under the Charter of Budget Honesty Act 1998 (Cth)). the Senate should pass the Bill. 2.8 Treasury Laws Amendment (2017 Measures No 1) Bill 2017 (16 February 2017) The Treasury Laws Amendment (2017 Measures No 1) Bill 2017 was introduced into the House of Representatives and proposes to amend section 127(2A) of the Australian Securities and Investments Commission Act 2001 to ASIC to share information with the ATO without requiring the ASIC Chairperson or its delegate to be satisfied that doing so would enable or assist the Commissioner of Taxation to perform or exercise their functions or powers. The new law amends the ASIC Act to specify that the sharing of confidential ASIC information with the Commissioner of Taxation is authorised use and disclosure of that information. 2.9 Crimes Amendment (Penalty Unit) Bill 2017 (16 February 2017) The Bill was introduced into the House of Representatives and proposes to increase the amount of the Commonwealth penalty unit from $180 to $210, with effect from 1 July

6 2.10 Corporations Amendment (Professional Standards of Financial Advisers) Act 2017 (24 February 2017) The Corporations Amendment (Professional Standards of Financial Advisers) Act 2017 has received royal assent. The Act amends the Corporations Act to raise the education, training and ethical standards of financial advisers by requiring relevant providers to hold a degree (or higher or equivalent) qualification, pass an exam, undertake a professional year, undertake continuous professional development and comply with a Code of Ethics (Code). The Act will insert the following provisions into the Corporations Act: (e) (f) (g) (h) 3. CASES new education and training standards (education standards) that must be met by individuals who provide personal advice on relevant financial products to retail clients (Relevant Providers); transitional arrangements that apply to existing advisers; a new requirement that relevant providers comply with the Code; an obligation on an AFSL holder to ensure that its relevant providers comply with the new education standards, and are covered by a compliance scheme; a restriction on the use of the titles financial adviser and financial planner so that they can only be used Relevant Providers; amendments to the content requirements for the register of Relevant Providers; the provision of appropriate sanctions where a Relevant Provider or licensee fails to comply with the new obligations; and recognition of a new standards body which will set the details of the new education standards and develop the Code. The Act takes effect within 6 months of royal assent. There were no cases of interest during this period. 4. OTHER RECENT DEVELOPMENTS 4.1 Design and distribution obligations and product intervention power (13 December 2016) In response to the Financial System Inquiry Report, the Government accepted the FSI s recommendations to create new accountability obligations for entities that issue or distribute financial products (recommendation 21) and to strengthen consumer protection by introducing financial product intervention powers (recommendation 22). Accordingly, the Government released a proposal paper detailing proposed positions on the nine key implementation issues for the abovementioned measures: Design and distribution obligations: Issue 1: What products will attract the design and distribution obligations? Summary of proposal: the obligations will apply to financial products made available to retail clients except ordinary shares. This would include insurance products, investment products, margin loans and derivatives. The obligations would not apply to credit products (other than margin loans). Issue 2: Who will be subject to the obligations? Summary of proposal: issuers and distributors of financial products must comply with 6

7 the obligations. Issuers are the entities responsible for the obligations under the product. Examples of issuers include insurance companies and fund managers. Distributors are entities that either arrange for the issue of the product to a consumer or engage in conduct likely to influence a consumer to acquire a product for benefit from the issuer (for example, through advertising or making disclosure documents available). Distributors that provide personal advice will be excluded from the distributor obligations. Examples of a distributor include a credit provider that offers its customers consumer credit insurance or a fund manager that distributes its products using a general advice model. Issue 3: What will be expected of issuers? Summary of proposal: issuers must: (i) (iii) identify appropriate target and non-target markets for their products; select distribution channels that are likely to result in products being marketed to the identified target market; and review arrangements with reasonable frequency to ensure arrangements continue to be appropriate. Issue 4: What will be expected of distributors? Summary of proposal: distributors must: (i) Product intervention power: put in place reasonable controls to ensure products are distributed in accordance with the issuer s expectations; and comply with reasonable requests for information from the issuer related to the product review. Issue 5: What products will attract the product intervention power? Summary of proposal: the power would apply to all financial products made available to retail clients (securities, insurance products, investment products and margin loans) and credit products regulated by the National Consumer Credit Protection Act 2009 (Cth) (credit cards, mortgages and personal loans). Issue 6: What types of interventions will ASIC be able to make using the power? Summary of proposal: ASIC can make interventions in relation to the product (or product feature) or the types of consumers that can access the product or the circumstances in which consumers access it. Examples of possible interventions include imposing additional disclosure obligations, mandating warning statements, requiring amendments to advertising documents, restricting or banning the distribution of the product. Issue 7: When will ASIC be able to make an intervention? Summary of proposal: in order to use the power, ASIC must identify a risk of significant consumer detriment, undertake appropriate consultation and consider the use of alternative powers. ASIC must determine whether there is a significant consumer detriment by having regard to the potential scale of the detriment in the market, the potential impact on individual consumers and the class of consumers likely to be impacted. Issue 8: What will be the duration and review arrangements for an ASIC intervention? Summary of proposal: an intervention by ASIC can last for up to 18 months. During this time, the Government will consider whether the intervention should be permanent. The intervention will lapse after 18 months (if the Government has not made it permanent). ASIC interventions 7

8 cannot be extended beyond 18 months. ASIC market wide interventions are subject to Parliamentary disallowance. ASIC individual interventions are subject to administrative review. (e) Issue 9: What oversight will apply to ASIC s use of the power? Summary of proposal: interventions made by ASIC in relation to an individual product or how a specific entity is distributing a product will be subject to administrative and judicial review. The Government will review ASIC s use of the power after it has been in operation for five years. Comments are due by 15 March ATO Draft Law Companion Guideline LCG 2016/D11 (14 December 2016) The ATO released Draft Law Companion Guideline LCG 2016/D11 Superannuation reform: concessional contributions defined benefit interests and constitutionally protected funds for comment, following changes introduced by the Treasury Laws Amendment (Fair and Sustainable Superannuation) Act 2016 (Cth) that will take effect in the 2018 Financial Year The Draft Guideline proposes to clarify how the amendments to the calculation of concessional contributions and excess concessional contributions apply to contributions and amounts allocated by superannuation providers for the financial years commencing on or after 1 July Comments were due by 23 January Development of the framework for Comprehensive Income Products for Retirement (15 December 2016) The Government released, for public consultation, a discussion paper that explores the key issues in developing the framework for Comprehensive Income Products for Retirement (CIPR) products Feedback to assist the development of the CIPRs framework is sought on the following: the structure and minimum requirements of CIPRs; the framework for regulating CIPRs; and the offering of a CIPR. Comments are due by 28 April ATO Draft Law Companion Guideline LCG 2016/D12 (21 December 2016) The ATO released Draft Law Companion Guideline LCG 2016/D12 Superannuation reform: total superannuation balance for comment. The Draft Guideline describes how the Commissioner will apply the law in the Treasury Laws Amendment (Fair and Sustainable Superannuation) Act 2016 (Cth). The Draft Guideline proposes to clarify how a member s total superannuation balance is calculated from 30 June 2017 and is relevant for determining a member s eligibility for the: unused concessional contributions cap carry forward; non-concessional contributions cap and for the bring forward of your non-concessional contributions cap; government co-contribution; and tax offset for spouse contributions. Comments were due by 6 February

9 4.5 ASIC action against Westpac entities in relation to the best interests duty (22 December 2016) ASIC has commenced civil penalty proceedings against Westpac subsidiaries Westpac Securities Administration Limited (WSAL) and BT Funds Management Limited (BTFM) for contraventions, including failures of the FOFA best interests duty. ASIC alleges that during two telephone campaigns, WSAL and BTFM provided personal financial product advice to customers, specifically recommending that customers roll out of their other superannuation funds into their Westpac-related superannuation accounts. WSAL and BTFM are not permitted to provide personal financial product advice under their Australian financial services licences. Further, ASIC alleges that WSAL and BTFM did not undertake a proper comparison of the superannuation funds as required by law. ASIC also alleges that WSAL and BTFM have: failed to do all things necessary to ensure that the financial services covered by their licences are provided efficiently, honestly and fairly; failed to comply with the conditions of their licences which only permits those licensees to provide general advice; and failed to comply with the financial services laws in the Corporations Act. These proceedings form part of ASIC s Wealth Management Project, focusing on the wealth divisions of the major banks, AMP and Macquarie. 4.6 ATO Draft Law Companion Guideline LCG 2017/D1 (13 January 2017) The ATO released Draft Law Companion Guideline LCG 2017/D1 Superannuation reform: defined benefit income streams pensions or annuities paid from non-commutable, life expectancy or marketlinked products for comment. The Draft Guideline proposes to clarify how the defined benefit income cap applies to superannuation income stream pensions or annuities that are paid from non-commutable, life expectancy or marketlinked products. The guidance follows changes made to the income tax treatment of certain defined benefit income stream benefits, commencing in the 2018 Financial Year, as made by the Treasury Laws Amendment (Fair and Sustainable Superannuation) Act The Draft Guideline proposes to cover the following capped defined benefit income streams (as listed in the ITAA 1997, section ) 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). Comments were due by 17 February Government acting on Super Guarantee non-compliance (25 January 2017) The Government has announced that it has established a new multi-agency working group to investigate and develop practical recommendations to deal with superannuation guarantee noncompliance. 9

10 Chaired by the ATO and comprising senior representatives from Treasury, the Department of Employment, ASIC and APRA, the working group will identify the drivers of non-compliance and develop ways to improve compliance and policy options to ensure the law remains fit for purpose. The working group is due to provide an interim report to the Minister for Revenue and Financial Services at the end of this month, with a final report due in March Social Impact Investing Discussion Paper (28 January 2017) The Federal Government released its Social Impact Investing Discussion Paper for the purpose of exploring ways it can develop the Australian social impact investing market. The Discussion Paper describes social impact investments as investments made with the intention of generating measurable social and/or environmental outcomes in addition to a financial return. Section 5 of the Discussion Paper considers the interaction between superannuation law and social impact investing and notes: trustees are duty-bound to make decisions in the best interests of members (which is generally construed as the best financial interests); trustees must give regard to the risk and the likely return from the investments, diversification, liquidity, valuation and other relevant factors, when formulating an investment strategy. However, trustees may take additional factors into account where there is no conflict with the requirements in the law (which may include social impact investing, provided that it does not conflict with the abovementioned duties); a number of super funds currently offer choice products for members who want to invest in a socially responsible manner, with a steady stream of new products being released on a regular basis. It is also common for superannuation fund trustees to make social impact investments through externally managed pooled vehicles; and APRA s Prudential Practice Guide SPG 530 Investment Governance states that trustees can offer ethical investments (which includes social impact investing), provided trustees comply with the legal requirements described above and that a trustee can demonstrate appropriate analysis and a reasoned basis to support the formulation of an investment strategy that has ESG considerations. The Discussion Paper states that some stakeholders have suggested that APRA provide clearer guidance on the appropriateness of impact investment for trustees, noting that it would be difficult to provide very specific guidance. Therefore the Government seeks views on what guidance in particular would provide a desired level of clarity on the fiduciary duty of superannuation trustees on impact investing. Submissions close 27 February Mills Oakley Comment I think it is important for trustees to consider this question, and any outcomes that may arise from submissions (or the lack thereof) that will impact their investment decision-making on behalf of members. It is clear that the 2015 divestment of Transfield, by some funds, demonstrated different approaches to matters such as deciding whether to invest/divest in light of (what may have been divergent) investment and member considerations, as well as how trustees justify their actions (admittedly this was more ESG-related, but on a similar vein). Remember, not everyone who is required to put away their hard-earned 9.5% may (or should, for that matter) have social impact investing front of mind, or take the view that it has a place in superannuation, and may question a trustee s decision to make such investments (especially if returns fall). Clearer rules and boundaries should be welcomed by all, but they require industry input. 10

11 4.9 ASIC imposes licence conditions on NAB s superannuation trustee (2 February 2017) ASIC has imposed additional licence conditions on the Australian financial services licence of National Australia Bank s (NAB) superannuation trustee, NULIS Nominees (Australia) Limited (NULIS), following breakdowns in internal procedures. The conditions require NULIS to engage an ASIC-approved independent expert (KPMG) to assess and report on the adequacy of its compliance and risk management practices for its retail and wrap superannuation funds. The conditions were imposed on NULIS following ASIC s enquiries into breach reports lodged by NAB s wealth entities following the transfer in 2012 and 2013 of all members in a number of products to MLC MasterKey Business Super (MKBS) and MLC MasterKey Personal Super (MKPS), as well as changes made to the death and total and permanent disablement (TPD) insurance of MKBS and MKPS members. Approximately 400,000 members were impacted by the insurance changes. According to ASIC, the system breakdowns included: inadequate disclosure of insurance changes to members; inadequate training for staff, and the failure to update insurance policies, resulting in incorrect death and TPD insurance tests being applied to MKBS and MKPS members between May 2013 and July NAB s wealth entities have identified that 10 members insurance claims were incorrectly assessed with approximately $1.6 million in members claims underpaid or declined. NAB compensated these members. In addition, NAB s wealth entities identified that over 220,000 member accounts were incorrectly charged planned service fees (PSFs) of approximately $34.7 million between September 2012 and October 2016 in the MKPS and MKBS products. Members were charged PSFs for the provision of general advice in circumstances where no plan adviser had been appointed to provide such advice. NAB confirmed that it will compensate those members for the incorrect charge. The independent expert s review will consider, among other things NULIS : risk management procedures; process for implementing product changes, disclosure and reporting to members, and procedures for managing conflicts of interest within NAB s superannuation business, including the assessment of related party service providers. KPMG will report to ASIC and NULIS and provide recommendations as to any steps that NULIS should take to ensure that its procedures are adequate. Under its AFSL conditions NULIS is also required to inform ASIC of any recommendations that it does not propose to implement and provide reasons. ASIC has acknowledged the cooperative approach taken by NAB and NULIS in this matter Amendment to terms of reference of the External Dispute Resolution Review (3 February 2017) The Minister for Revenue and Financial Services has released amended terms of reference for the review of the financial system s external dispute resolution and complaints framework (EDR Review) to include: the making of recommendations (rather than merely observations) on the establishment, merits and potential design of a compensation scheme of last resort; and consideration of the merits and issues involved in providing access to redress for past 11

12 disputes. The amended terms are in response to the Government s report of the Australian Small Business and Family Enterprise Ombudsman Inquiry into small business loans. In order to fully consider the amended terms of reference, the EDR Review Panel intends to release a separate issues paper on the additional matters and will seek the views of stakeholders. Further, the Government has provided a three-month extension to the initial reporting date of end March 2017 to enable it to consider and consult on the issues contained in the amended terms of reference. The EDR Review Panel will still provide the Government with a final report on the issues contained in the original terms of reference by the end of March 2017, and a separate report on the additional terms of reference by the end of June ATO Draft Law Companion Guideline LCG 2017/D3 (13 February 2017) The ATO released Draft Law Companion Guideline LCG 2017/D3 Superannuation Reform: Transfer Balance Cap - Superannuation death benefits for comment. The Draft Guideline proposes to clarify how superannuation income streams that are superannuation death benefits (death benefit income streams) are dealt with under the transfer balance cap provisions contained in the Treasury Laws Amendment (Fair and Sustainable Superannuation) Act The Draft Guideline proposes to cover the treatment of reversionary and non-reversionary death benefit income streams as follows: 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 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 give the reversionary beneficiaries sufficient time to adjust their superannuation affairs before any consequences, such as a breach of their transfer balance cap, takes effect; and 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. That is, if the defined benefit income received from the reversionary income stream, either on its own or in combination with other defined benefit income received, exceeds the a reversionary beneficiary s defined benefit income cap during the first 12 months, then they may have to pay more income tax on that income. The transfer balance credit that arises in the reversionary beneficiary s transfer balance account is equal to the value of the superannuation interest that supports the death benefit income stream: (i) for death benefit income streams commencing before 1 July 2017: the value just before 1 July 2017 for death benefit income streams commencing on or after 1 July 2017 the value on the Starting Day. Comments are due by 10 March

13 4.12 Board Governance of Not for Profit Superannuation Funds (16 February 2017) Former Governor of the Reserve Bank of Australia, Bernie Fraser, has finalised and released his report (Report) in response to the Government s proposals to require the trustee boards of superannuation funds to have at least one-third independent directors, including an independent Chair (One-Third Rule). The Report was written at the request of Industry Super Australia and the Australian Institute of Superannuation Trustees (AIST), and therefore is focused on primarily on Not for Profit Superannuation Funds (NFPs) including Industry Superannuation Funds. The Report s effect The Report will be considered forms part of wider advocacy on behalf of Industry Superannuation Funds that is intended to impact the introduction and passing of the impending Superannuation Legislation Amendment (Governance) Bill and advocates against the One-Third Rule. Included in the Report are the following observations: (e) (f) Australia s superannuation system, its history and culture differ to overseas pension funds and, therefore, applying those models into our own system may not be beneficial; there is diversity within the Industry Superannuation Fund Sector, itself, that provides an array of benefits for members. This diversity helps to drive innovation and growth, in some respects; the focus on directors should be on skills, as opposed to independence ; there has been growth in the skill sets of Industry Superannuation Fund boards overtime, and this continuing; APRA s regulation of superannuation funds and, especially, its introduction of the APRA Prudential Standards provide adequate safeguards; the behaviour and performance of all superannuation funds depends on more than their Boards. The calibre of senior management and staff generally are obviously important also, as are the relationships between the Board and management, and in the case of Industry Superannuation Funds, between the Board and the sponsoring organisations; and supporting the above point, the quality of advisers to a fund is also important. The Report acknowledges that Industry Superannuation Funds have been embroiled in some controversy as have Retail Superannuation Funds, leading to the question: The debate about independence really comes down to the question: independence from what? To the extent that the answer is independence from executive management, this is hardly an issue for the governance of NFP Funds, which effectively ban executive directors from their Boards. A broader and arguably better answer to the question is to view independence as a defence from all the dangers and obstacles that can get in the way of pursuing a clear and committed objective. Such independence is never absolute. The Report s recommendations The Report refers to the AIST s Governance Code (Code) which will be mandatory for all AISTmember funds (so not all Industry Superannuation Funds) and is proposed to take effect from 1 July The Report proposes that the Code should adopt the following recommendations (this is a summary only): Boards of Directors: Values/Selection Processes: (A) to make clear in their informal charters that the unique commitment of 13

14 (B) (C) Skills/Selection Processes: (i) (iii) (iv) (v) (vi) Board Chairs: Board Renewal: NFP funds to their members (encapsulated in all profits to members ) should be embedded in the fund s processes wherever appropriate; to require Board Nominations Committees to include a comprehensive assessment of candidates compatibility with the fund s values when reporting on their suitability as prospective directors; and to require newly appointed (and reappointed) directors to confirm at the time of their appointments that they understand the fund s values, are comfortable with them, and see no conflicts with them to re-enforce in their charters the central importance of relevant skills and experience, and commit to maintaining an appropriate mix of skills and experiences on the Board at all times; the whole Board should discuss and agree a detailed skill/experience profile tailored to any Board vacancy, having regard to current and prospective gaps in the Board s skill set; where the relevant sponsoring organisation puts forward a nominee to fill a vacancy that nominee shall be appointed if a majority of the Board agrees that the nominee satisfies the Agreed Skill Profile (and other relevant requirements); policies should be developed to deal with rare but possible situations where the Board and sponsors are unable to reach agreement on the proposed appointment; where a new director position has been created to fill a particular - and possibly urgent - gap in the desired skill mix the Nominations Committee process should be activated at the outset; the Board should have effective processes to liaise as appropriate with sponsoring organisations on these recommendations. NFP funds should always appoint the best of the available candidates (from within the existing Board or, if necessary, from outside) as Chairs, whether or not that person was independent, and irrespective of any previously established rotational arrangements. Given the critical role of skills and experience in the performance of NFP funds, Boards of these funds should pay particular attention to renewal policies, including: (i) Member Communication: tenure policy - this is one of those areas where reasonable discretion is likely to deliver better outcomes than rigid rules, partly because of size and other differences across funds but partly also because it makes sense to extend tenure where a director s continued engagement and contributions were demonstrably valuable to the fund; for these reasons Boards should adopt a pragmatic approach to tenure, including a preparedness to argue for extended periods of tenure in exceptional circumstances ; and gender balance one area where a firm target could improve Board Governance is gender equality and AIST should establish and monitor a target to achieve gender equality on Boards across the NFP sector as a whole by mid As part of their on-going policies to improve communications with members, Boards of NFP 14

15 funds should commit to addressing a range of Board governance issues in their annual reports to members and at other times and in other ways (such as member conferences and workplace meetings) as appropriate. Implementation of Recommendations: AIST members should give consideration to these recommendations in the course of finalising their draft Governance Code ATO Legislative Instrument ID 2017/SPR/0002 Reporting of all new member accounts and closed member accounts by superannuation providers in relation to superannuation plans (other than self managed superannuation funds) in accordance with the Taxation Administration Act 1953 (22 February 2017) The Legislative Instrument sets out the way in which superannuation providers in relation to superannuation plans are required to report all new member accounts and closed member accounts in accordance with section of Schedule 1 to the Taxation Administration 1953 (Cth) (TAA). The Legislative Instrument s principal purpose is to set out the form and manner in which statements are to be provided to report new member accounts and closed member accounts daily or as soon as practicable after the event, but no later than 5 business days. The legislative instrument also establishes the due dates for lodgment of statements, which can be deferred subject to the Commissioner s discretion under section of Schedule 1 to the TAA. The Legislative Instrument s effect is that superannuation providers have guidance on: their obligations to lodge statements in the approved form to report new member accounts and closed member accounts; the dates by which they must be lodged; and the penalty that may be applied for failure to lodge on time in the approved form (administrative penalty under section of Schedule 1 to the TAA). There is no change to the reporting requirements detailed in the Legislative Instrument ID F2014L00691 Lodgment of statements by superannuation providers in relation to superannuation plans (other than self managed superannuation funds) for each financial year ended 30 June in accordance with the Taxation Administration Act 1953 that requires the lodgment of member contributions statements by superannuation providers under section of Schedule 1 to the TAA. The Legislative instrument will apply from 31 March Luke Hooper Special Counsel T: E: lhooper@millsoakley.com.au 15