The superannuation industry has weathered a storm of speculation, proposals, recommendations and announcements over recent weeks. In this Update, we review the state of play, taking into account the Budget announcements, the Government's response to the Henry Tax Review, and the preliminary recommendations made by the Cooper Review Panel.
After releasing its major superannuation reform proposals in its response to the Henry Review (see below), the Government announced a limited number of new superannuation measures in the Budget. The Budget announcements include:
- Co-contributions - The Government Co-contribution will be subject to a number of restrictions including setting the matching rate at 100%, permanently reducing the maximum amount of the Co-contribution to $1,000, and removing indexation of the qualifying income thresholds.
- Excess contributions amendments - A number of 'minor amendments' have been proposed to the superannuation laws, including allowing the Commissioner of Taxation to exercise his discretion for the purposes of excess contributions tax before an assessment is issued. Excess contribution issues have plagued a large number of fund members, who have faced difficulties in persuading the Commissioner to exercise his discretion to disregard genuine mistakes. One such difficulty has been the need to wait for an excess contribution tax assessment to be issued rather than have the matter dealt with promptly upon discovery of an excess contribution, and this amendment will assist in that regard. There is no announcement, however, dealing with other excess contribution issues raised by professional and industry groups over recent months, such as the increasing amounts of excess contributions arising through the interaction of the contribution caps and the superannuation guarantee (SG) contribution requirements, and the inflexible stance taken by the Australian Taxation Office (ATO) as regards the reversal of mistaken contributions.
- Deductions for the payment of terminal medical condition benefits - This measure is designed to match the treatment for such benefits with the payment of death, permanent incapacity and temporary incapacity benefits.
- First Home Saver Accounts - It is proposed that amounts held in First Home Saver Accounts, which are not applied in the purchase of a home at the end of the four year qualifying period, may be transferred into an approved mortgage rather than moved into superanuation.
- Deduction for contributions - successor funds - It is proposed that fund members will be able to lodge a claim for a deduction for eligible contributions where their interests have been transferred to a successor fund.
- Extension of loss relief for merging superannuation funds involving a new complying superannuation entity - The Government has extended the loss relief, which applies to existing funds merging with another existing fund from 24 December 2008 to 30 June 2011, to also cover arrangements involving existing funds merging into a new fund.
Henry Tax Review - Superannuation
Four major changes by the Government
On 2 May 2010, the Government announced four superannuation proposals in response to the Henry Report, although none of these were adopted from recommendations in the Henry Report. The four proposals are:
- Increase SG to 12% - The SG rate is to be increased from 9% to 12%. The change will be phased in gradually from 1 July 2013, with the rate increasing by 0.25% for the 2013/14 and 2014/15 years and by 0.5% for the 2015/16 to 2019/20 years.
- Increase compulsory SG age to 75 - The SG age limit is to be raised from 70 to 75 from 1 July 2013.
- Increase concessional contributions cap - The concessional contributions cap for members aged 50 and over is to be increased to $50,000 from 1 July 2012 for those members with superannuation balances below $500,000. The current $50,000 superannuation concessional contributions cap for members aged 50 or over is scheduled to expire from 1 July 2012. The Government has not announced any details of how this new cap is to be calculated and reported, and there will obviously be complexity in determining when members are eligible to access the higher cap. In particular, it is not clear whether funds will have any role in administering the caps or whether members will need to know the exact value of all their superannuation interests before contributing. There have been no changes announced to the non-concessional limits or the 'bring forward rule' for non-concessional contributors.
- Government contribution for low income earners - For individuals with adjusted taxable income of up to $37,000 from 1 July 2012, the Government will make a contribution of 15 cents for every $1 of concessional contributions made (capped at $500). This is intended to have the effect of eliminating the 15% contributions tax paid by superannuation funds on contributions from low-income earners.
The Henry Report made seven recommendations in relation to superannuation
The Henry Report made seven recommendations in relation to superannuation, none of which were taken up by the Government. The recommendations were:
- Abolition of contributions tax - Tax on superannuation contributions in the fund should be abolished. Instead, employer superannuation contributions should be treated as income in the hands of the individual and taxed at their marginal tax rate. Employees should then receive a flat-rate refundable tax offset, which would ensure that the majority of taxpayers do not pay more than 15% tax on their contributions.
- Fund tax halved - The rate of tax on superannuation fund earnings should be halved to 7.5%. The capital gains tax discount and the tax free earnings while in pension phase should be abolished (ie all income is taxed at 7.5%).
- No age limit for contributions - People aged 75 and over should no longer be prevented from making contributions, and the work test should still apply for people aged 65 and over.
- Develop longevity market - The Government should support the development of a longevity insurance market within the private sector.
- Annuity products - The Government should consider offering immediate annuity and deferred annuity products that would allow a person to purchase a lifetime income stream.
- Super awareness measures - The Government should help make people more aware of the retirement income system so they can better manage their superannuation, through a number of measures. For example: SG should be paid at the same time as wages, and employers should report superannuation contributions to their employees when a contribution is made.
- Preservation age should be increased - The Government should align the preservation age with the pension age (ie to age 67). This recommendation was explicitly ruled out by the Government
Cooper Review on Superannuation
Phase Three preliminary report 'Self Managed Super Solutions'
The Cooper Review Panel (Panel), which is scheduled to deliver its final report to the Government on 30 June 2010, has released its preliminary report on self managed superannuation funds (SMSFs). The report has made a number of preliminary recommendations, including:
- Abolition of 5% in-house asset limit - The 5% 'buffer' for in-house asset investments should be removed so that a fund is no longer able to hold in-house asset investments. SMSFs would be given a transitional period to 30 June 2020 to dispose of all in-house assets. It is not proposed to unwind the previous 1999 grandfathering arrangements (ie pre-1999 trusts and investments) or alter the existing in-house asset definition exemptions. If this recommendation were implemented, it would mean that all existing in-house assets would need to be disposed of but that any investments that are not in-house assets because they are either pre-1999 arrangements or fall within the in-house asset exemption could continue to be held by an SMSF. Funds regulated by the Australian Prudential Regulation Authority (APRA) would be exempted from these changes.
- Related party acquisitions/disposals be at market value - Mechanisms should be put in place to ensure hat acquisitions and disposals involving related parties are done at market value. Where an asset is held in an underlying market all acquisitions or disposals would be conducted through that market. Where there is no underlying market such acquisitions or disposals would be supported by a current independent valuation from a registered valuer. APRA-regulated funds would be exempted from these changes.
- Prohibition against holding collectables and personal use assets - The acquisition of collectables and personal use assets by SMSFs should be prohibited and all existing collectables or personal use assets should be disposed of by 30 June 2020. APRA-regulated funds would be exempted from these changes.
- All SMSF accounts to value assets at their net market value - SMSFs should be required by legislation to value their assets at net market value.
- SMSF borrowing - The Panel has raised concerns in relation to borrowing by superannuation funds, and recommends that the borrowing powers introduced in 2007 be reviewed within two years to ensure that borrowing does not become, nor look like becoming, a significant focus of superannuation funds.
- Sliding scale of penalties - The ATO should be given the power to issue administrative penalties against SMSF trustees on a sliding scale to reflect the seriousness of the breach. Such a penalty should not payable by the fund, but rather paid personally by the trustee(s) or the director(s) of the corporate trustee. The Panel has also stated that it does not see any sound reason why a sliding scale of penalties should not similarly be extended to APRA, and will address this further in its final report.
- ATO be given power to compel compliance - The ATO should be given power to issue SMSFs with a direction to rectify a contravention within a specified reasonable time, rather than the current system of enforceable undertakings.
- Mandatory education of trustees - Although the Panel does not favour mandatory trustee education for all SMSFs, its preliminary recommendation is that the ATO be given power to enforce mandatory education for trustees who have contravened the Superannuation Industry Supervision Act 1993 (Cth) and corresponding regulations (SIS). The cost of the education would be met by the trustees personally, not from the fund.
- Death benefit disputes - The Superannuation Complaints Tribunal (SCT) should be given jurisdiction to resolve death benefit disputes between a SMSF trustee and a beneficiary who is not a member or a person in their capacity as a legal personal representative of a deceased member, and to resolve disputes involving external insurance.
- Separate SMSF section in SIS - SIS should be restructured to include separate provisions relating only to SMSFs.
- SIS private binding rulings - The ATO should be given power to issue binding rulings in relation to SMSFs and SIS.
- Competency requirements for financial planners - Regulatory Guide 146: Licensing - Training of Financial Product Advisers should be amended to include a specialist SMSF knowledge component to increase the knowledge and competency requirements applicable to financial advisers with respect to SIS before they can give advice in relation to SMSFs.
- Pre-SMSF establishment requirements - The Panel has set out several discussion points regarding restrictions on establishing SMSFs, including prescribing a minimum asset size requirement, requiring prospective SMSF members to seek advice from a licensed adviser, requiring service providers who establish SMSFs to hold an Australian Financial Services Licence or requiring prospective SMSF members to complete an online module on a government website which would take them through their suitability to be a member and trustee of an SMSF. Although the Panel has not reached a firm view, it favours the online module option.
- SMSF auditor requirements - The Panel has made several preliminary recommendations in relation to SMSF auditors, including that all auditors be required to meet minimum competency and knowledge standards, and registered with a registration body that has the power to develop and set those competency standards.
- The Panel also recommended legislating full audit independence for SMSF audits, such that any individual or firm providing services in connection with an SMSF or its trustee(s) or director(s) of the corporate trustee should be prohibited from auditing that SMSF.
- Identity fraud measures - In order to make fraud and early release schemes more difficult, the Panel has made a preliminary recommendation that proof of identity checks be required for all persons joining a new or existing SMSF, and also applied retrospectively in respect of existing SMSFs wishing to organise rollovers from an APRA-regulated fund.
- Other recommendations - SMSFs to provide members with minimum information, the removal of unnecessary administration requirements, changes to SIS automatically included in SMSF deeds and compulsory separation of assets.
Other preliminary reports
The Panel has also recently released the following preliminary reports:
- SuperStream - This report was prepared in response to the Panel's Phase Two: operation and efficiency issue paper. The report focuses on a number of proposals for back office reforms that it collectively refers to as 'SuperStream'. Those measures include improving data records, technology processing, electronic payments and information to replace paper methods, expanding the use of tax file numbers as a proof of identity measure, encouraging the consolidation of multiple member accounts and eliminating redundant processes, leading to simpler rollovers and consolidations.
- MySuper - This report was released after the Panel received responses to its Phase One preliminary report called 'Clearer Super Choices'. The report proposes that in order for a superannuation fund to receive SG payments as a 'default fund' it would have to offer a 'MySuper' account as its default member account option. It is proposed that MySuper would be a 'simple, cost-effective product'. Some of the proposed features of MySuper include: a single investment strategy, 'sufficient' scale, reduction of cross-subsidisation, compulsory benchmarking, no bundled advice, a ban on trailing commissions, no contribution fees, a new duty on trustees to manage the overall cost to members, default opt out life insurance, a default post-retirement product and strictly member-focused Trustee duties. It should be remembered that these preliminary recommendations of the Panel are intended to indicate 'the likely shape' of the final recommendations to be made by 30 June 2010. How the recommendations ultimately translate into Government policy remains to be seen.
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