Issue 532, 1 May 2014
In this issue:
- Commission of Audit report
- FATCA intergovernmental agreement signed
Commission of Audit report
The Commission of Audit report was published today containing a combination of long-term and shorter-term recommendations.
Specifically, the National Commission of Audit was asked to provide advice on how best to ensure government spending is as efficient and as well targeted as possible. The report is not a report by the government, but rather a report to the government. The report is available here.
Of interest to trustees will be the following areas, as these recommendations have the potential to impact superannuation fund members:
- Recommendation 12: The Age Pension – establishing a new benchmark. The Commission recommends changing the Age Pension index arrangements by indexing it to the new (lower) benchmark of 28 per cent of Average Weekly Earnings, whereas the Age Pension is currently indexed at 27.7 per cent of Average Male Weekly Earnings. This means that the Age pension will be nearly $300 a fortnight less in 2048.
- Recommendation 13: Age Pension – tighter targeting of eligibility. The Commission recommends that future changes be made to ensure it is more sustainable, affordable and better targeted by:
- formally linking the eligibility age of the Age Pension to 77 per cent of life expectancy at age 65 from 2033. This will result in the eligibility age for the Age Pension increasing to around 70 by 2053. The proposed change would not affect anyone born before 1965
- replacing the current income and assets tests with a single comprehensive means test. Under this approach, the existing assets test would be abolished, with the income test extended by deeming income from a greater range of assets. The new comprehensive means test would apply prospectively to new recipients of the Age Pension from 2027/28 onwards
- including in the new means test the value of the principal residence above a relatively high threshold. The threshold in 2027/28 would be equivalent to the indexed value of a residence valued today at $750,000 for coupled pensioners and the indexed value of a residence valued today at $500,000 for a single pensioner. This change would apply prospectively to new recipients of the Age Pension from 2027/28 onwards. This could potentially result in a lower pension for single Age Pensioners in major capital cities. Further consideration of the impact of reverse mortgages is also needed
- increasing the income test withdrawal (taper) rate from 50 per cent to 75 per cent. This change would apply prospectively to new recipients of the Age Pension from 2027/28 onwards. Increasing the withdrawal rate would have substantial adverse impacts on those saving for retirement through superannuation or otherwise. It would mean that an extra dollar of private income in retirement would reduce the Age Pension by 75 cents. Among other things, such a change would make it very unattractive for Age Pensioners to undertake any part-time work in retirement as most of the wages received would be offset by a reduction in Age Pension payments.
- Recommendation 14: superannuation preservation age. The Commission recommends some changes be made to the superannuation system to complement changes being recommended for the Age Pension by:
- increasing the superannuation preservation age to five years below the Age Pension age
- extending the current phased increase in the preservation age by an extra four years, so the preservation age reaches 62 by 2027
- increasing the preservation age in conjunction with the Commission’s proposed increases in the Age Pension age thereafter.
- Recommendation 15: The Commonwealth Seniors Heath Card. The Commission recommends that the Commonwealth Seniors Health Card be maintained as part of Australia’s retirement income system, but that changes be made to improve targeting to those most in need by adding deemed income from tax-free superannuation to the definition of adjusted taxable income used for determining eligibility for the Commonwealth Seniors Health Card. On equity and sustainability grounds, such a change in the income test is arguable.
As this is only a report to the government, it is now up to them to decide whether or not they take up any of the recommendations in the forthcoming budget. ASFA’s initial response to the report is contained in a media release available here.
A link to the press release by the Treasurer is available here.
FATCA: Australia and US sign intergovernmental agreement
On 28 April 2014, the Australian Government entered into an intergovernmental agreement (IGA) with the United States (US) to improve international tax compliance and implement the Foreign Account Tax Compliance Act (FATCA).
FATCA was enacted by the US Congress to detect US taxpayers who use accounts with offshore financial institutions to conceal income from the US Internal Revenue Service (IRS).
Under Annex II of the IGA the following superannuation entities are to be treated, for FATCA purposes, as Non-reporting Australian Financial Institutions, and as exempt beneficial owners:
- Australian retirement funds:
- a superannuation entity or public sector superannuation scheme or exempt public sector superannuation scheme, as defined in the Superannuation Industry (Supervision) Act or a constitutionally protected fund as defined in the Income Tax Assessment Act 1997 (ITAA 1997)
- a pooled superannuation trust as defined in the ITAA 1997
- any entity that is wholly owned by, and conducts investment activities, accepts deposits from or holds financial assets exclusively for the benefit of, an entity listed in 1 or 2 above.
- Investment entity wholly owned by exempt beneficial owners: an entity that is an Australian Financial Institution solely because it is an investment entity, provided that each direct holder of an equity interest in the entity is an exempt beneficial owner, and each direct holder of a debt interest in such entity is either a depository institution (with respect to a loan made to such entity), or an exempt beneficial owner.
The effect of the IGA is that Australian superannuation funds will not be required to register with, or report to, the US IRS for FATCA purposes.
ASFA has been working closely with the Australian Treasury over an extended period of time to achieve the above outcome.
Please note: Funds will still be required to complete the new W-8BEN-E form for certain investments. ASFA is trying to determine when the instructions for completing the new W-8BEN-E form will be released, and is also seeking clarification as to how items five and eight to ten should be completed by Australian superannuation funds.
Any questions should be directed to ASFA’s principal policy adviser, Robert Hodge.
