10 February 2017 Manager Superannuation Tax Reform Retirement Income Policy Division The Treasury Langton Crescent PARKES ACT 2600 Submitted via website portal Dear Sir/Madam, Submission Superannuation Reform Measures Exposure Draft Regulations Chartered Accountants Australia and New Zealand welcomes the invitation to make a submission on the release of exposure draft regulations on 16 September 2016 for some of the government s superannuation and related tax changes. Please note: our submission responds solely to the issues raised in the exposure draft regulations and related material and does not imply our views on other aspects of the superannuation system or on any past or future policy proposals. We would be please to discuss any aspect of our submission. Chartered Accountants Australia and New Zealand is a professional body comprised of over 120,000 diverse, talented and financially astute members who utilise their skills every day to make a difference for businesses the world over. Members are known for their professional integrity, principled judgment, financial discipline and a forward-looking approach to business which contributes to the prosperity of our nations. We focus on the education and lifelong learning of our members, and engage in advocacy and thought leadership in areas of public interest that impact the economy and domestic and international markets. We are a member of the International Federation of Accountants, and are connected globally through the 800,000-strong Global Accounting Alliance and Chartered Accountants Worldwide which brings together leading Institutes in Australia, England and Wales, Ireland, New Zealand, Scotland and South Africa to support and promote over 320,000 Chartered Accountants in more than 180 countries. We also have a strategic alliance with the Association of Chartered Certified Accountants. The alliance represents 788,000 current and next generation accounting professionals across 181 countries and is one of the largest accounting alliances in the world providing the full range of accounting qualifications to students and business. Chartered Accountants Australia and New Zealand 33 Erskine Street, Sydney NSW 2000, GPO Box 9985, Sydney NSW 2001, Australia T +61 2 9290 1344 F +61 2 9262 4841 charteredaccountantsanz.com
Schedule 1 (Transfer Balance Cap) of the Exposure Draft There are six different policy issues in this Schedule of the exposure draft reglations: 1. Remove the requirement for Self Managed Super Funds paying pensions and using the proportional accounting method to obtain an actuarial certificate so that assessable income and capital gains on fund assets supporting current pension liabilities will be tax exempt On balance for the reasons outlined below we are opposed to this measure. 2. Permitting the rollover of death benefits paid to a dependant beneficiary to another superannuation scheme We support this measure. 3. Amending the pension and annuity standards to permit the partial or full commutation of an income stream after the Commissioner of Taxation has issued an Excess Transfer Balance Determination under Division 136-A of the Income Tax Assessment Act 1997 in relation to a pension or annuity or a pensioner or annuitant has voluntarily requested a partial or full commutation of an income stream to avoid having an Excess Transfer Balance Whilst we do not support the Transfer Balance Cap we accept that now it is legislated, mechanisms are essential to enable the Cap to be appropriately and sensibly administered. Consequently we support this measure. 4. Adjust the requirements to issue a Product Disclosure Statement after the commutation of a pension or annuity and the proceeds are placed in a member s new or existing accumulation phase interest For comparable reasons outlined in point 3 above we support this measure. 5. Require that death benefit pensions paid to a dependant beneficiary are in the retirement phase For comparable reasons outlined in point 3 above we support this measure. 6. Prevent commutations from satisfying the minimum drawdown requirements for pensions and superannuation annuities For comparable reasons outlined in point 3 above we support this measure. However as explained below we believe that another rule needs to be put into place. In relation to these changes we make the following comments: Removal of requirement to obtain an actuarial certificate Before we provide substantive comment on this proposed change we wish to point out that in principle we are generally in favour of simplifying the nation s incredibly complex tax and superannuation laws and reducing tax compliance costs. The requirement for SMSFs to obtain an actuarial certificate so pension income is exempt from tax when using the unsegregated (ie, proportional) accounting method has been a controversial issue for sometime. Chartered Accountants Australia and New Zealand 2
We acknowledge that the calculation required to determine the percentage of assessable income and allowable deductions that is exempt from tax because it is being used to support pensions is not a difficult calculation and can be completed by someone who does not possess the high-end mathematical and analytical expertise of a fully qualified actuary. The last regulatory change in this area occurred in 2005 when actuarial certificates were removed for SMSFs using the segregated accounting method. Between 2005 and the current period it had been suggested to the Board of Taxation that removing this requirement for all SMSFs would save $25 million in administration fees. As we will exlain below we believe this estimated savings is over-stated. It is difficult to know the precise number of SMSFs that require annual actuarial certificates our best estimate for the 2017 financial year is between 130,000 to 140,000. There is a cohort of SMSFs that technically need an annual actuarial certificate however these are given an exemption from this requirement if the fund only pays account based pensions and has no accumulation or pre-retirement money in the fund. Our best guess is that there are about 65,000 SMSFs in this category. Some of this exempt cohort (and some SMSFs that use the segregated accounts approach) would be required to obtain an actuarial certificate if the government s proposed rule is not put in place. This will arise because either they will no longer be permitted to use segregated assets and/or will have to use the proportional method and will have pension and accumulation money. In total we estimate that this population is approximately 20,000 to 30,000 SMSFs. Therefore under the proposed Transfer Balance Cap rules we estimate that between 150,000 to 170,000 SMSFs would require an actuarial certificate if that particular requirement remained in place. As noted above we consider the $25 million estimated savings to be, at best, over-estimated and, at worst, to be non-existant. If we assume this estimate was made about 5 years ago, then at that time there would have been about 100,000 SMSFs requiring actuarial certificates. The $25m savings for about 100,000 SMSFs (that is, the approximate number of SMSFs that needed actuarial certificates 5 years ago) implies an average fee for each actuarial certificate of approximately $250. Based on our research very few SMSFs currently pay this fee in fact this fee would have applied more than 5 years ago. We believe the average fee for actuarial certificates is currently about $120 each. For a cohort of between 150,000 to 170,000 SMSFs this implies a total cost for the sector of between $18m and $20.4m not the $25 million that had been advised to the Board of Taxation. Why has the cost for the certificates been coming down? For a number of reasons including the following: Competition between the small number of actuarial firms who complete this type of work as well as pricing pressure from their clients The development of efficiencies by these actuarial firms that have reduced their cost of doing business some of which has then been passed onto their clients We have good reason for believing that removing the need for actuarial certificates will not result in these expected savings because SMSFs using the proportional accounting method will face increased administration, tax and auditing costs which will largely wipe out these expected savings and may actually cost SMSFs more than the current method. In 2013/14, SMSFs claimed an exemption for tax for their pension income of about $19 billion. By any measure this is a large number which has been growing strongly (ten years ago in 2003/04 only $1.5 billion was claimed in total and in the intervening period the average exemption claimed by SMSFs has increased by almost 60%). Chartered Accountants Australia and New Zealand 3
Given these facts it is reasonable to assume that if actuarial certificates are no longer required then the Tax Office will want to provide clear instructions to SMSF administrators and tax agents on how they want this calculation to be performed. It will also need to provide appropriate material to the small number of SMSF trustees who complete their own tax returns. In addition we believe it is reasonable to assume that the Tax Office will also ask SMSF auditors to verify that the inputs for this calculation are correct. Let us assume that SMSF administrators and tax agents, on average, charge $50 for their time to prepare this calculation and SMSFs auditors also charge, on average, $50 for their additional work. This makes total fees of $100 so the administrative saving is negligible if not potentially non-existant. We can envisage situations where SMSFs will actually pay more under the proposed system than current arrangements. During the early years of the proposed rule change, we believe it is reasonable to assume that the Tax Office will want to ensure that the tax exemption calculation is being performed accurately and where its compliance teams identify potential problems it will take early action to correct any problems and discourage any overstating of the pension tax exemption. As noted above we are not opposed to simplifying tax laws or reducing compliance costs. For the reasons outlined above we do not believe this proposed change, at a practical level, represents a simplification or reduces compliance costs. Perversely as we noted above this change may actually increase compliance costs for some SMSFs. Additional Rule for Partial Pension or Annuity Commutations At present the pension and annuity regulations contained in the Superannuation Industry (Supervision) Regulations and the Retirement Savings Accounts Regulations demands that a pro-rata minimum pension has to be paid when a pension or annuity is partially or fully commutated during a financial year. Under current drafting this rule will apply to partial or full commutations that occur because an Excess Transfer Balance Determination has been issued. That is, the ATO has told a taxpayer that some or all of their pension or annuity cannot receive any tax concessions and in effect income payments are not appropriate for that capital but before the commutation can take place a pro-rata income amount has to be paid. In our view this pro-rata income payment rule should not apply when a pension is being partially or fully commuted because of an Excess Transfer Balance Determination. We take this view for consistency the Transfer Balance Cap is being put in place by the government to prevent income being paid from pensions when, in the government s view, too much money has been transferred into these products, yet when pensions are compulsorily commuted because of this new rule, income has to be paid before the commutation can occur. In addition, without our suggested amendment, after the pro-rata pension income has been paid a super fund may not be able to comply with the ATO s Excess Transfer Balance Determination that has been issued to it because the pension s capial has been reduced by the income payment. We note that our suggested amendment is a separate issue to not permitting commutations to be used to satisfy the minimum income requirements for various pensions and annuities. Structure of Schedule 1 We appreciate the complexity of drafting these regulatory changes however we believe that these amendments would be easier to understand and comprehend if the structure of this Schedule was altered by having associated concepts grouped together. Comprehension and understanding would also be assisted if these regulations explanatory statement had the same logical flow as the regulations. Chartered Accountants Australia and New Zealand 4
To assist with better understanding these changes we would prefer if each sub-heading in proposed Schedule 1 was actually contained in their own Schedule. Schedule 2 (Deducting Personal Super Contributions) of the Exposure Draft As previously advised in our submissions relating to the Government s superannuation reform package we do not support restricting access to this policy measure. Further we do not support giving super funds the ability to self-determine that personal contributions made to their scheme will not be tax deductible. If the government decided to put this policy in place then we believe there needs to be a mandatory process for super funds to clearly publish if personal contributions cannot be claimed as a tax deduction and for the Tax Office to publish the list of funds that have used this proposed provision. If this information is not prominently published by super funds and the ATO then we can see super fund members innocently being denied a tax deduction for their personal super contributions. Additional Requirement in Regulations We note that paragraph 3.93 of the explanatory memorandum for the Treasury Laws Amendment (Fair and Sustainable Superannuation Bill 2016 and associated legislation says, because the deceased member s superannuation interest remains subject to compulsory cashing under the regulatory rules it cannot be mixed with the beneficiary s own superannuation interest. This being the case we note that in these situations, it will be essential to allow SMSFs to have more than one accumulation interest in situations where a death benefit pension is commuted. It maybe that this second interest will only need to exist for a short period of time but from a regulatory perspective it is required. We therefore request that a suitable regulatory amendment be made to the Income Tax Regulations 1997 to permit at least two SMSF accumulation interests in the above situation. Should you require any further information or wish to discuss the contents of this submission, please contact Tony Negline, Head of Superannuation on 02 8078 5404 or by email at tony.negline@charteredaccountantsanz.com Yours sincerely, Rob Ward FCA AM Head of Leadership & Advocacy Chartered Accountants Australia and New Zealand 5