Issue 880, 29 November 2022
In this issue:
Financial reporting and auditing requirements for superannuation funds: Bill introduced
The Government has introduced into Parliament reforms to extend the current financial reporting and auditing requirements imposed on registrable superannuation entities (RSEs), to align them with those that apply to public companies.
The reforms, in Schedule 6 of the Treasury Laws Amendment (2022 Measures No. 4) Bill 2022, are a re-introduction of measures from the previous Government’s Treasury Laws Amendment (Streamlining and Improving Economic Outcomes for Australians) Bill 2022 (see ASFA Action issue 842). That Bill lapsed when Parliament was dissolved for the election earlier this year.
The measures amend the Corporations Act 2001, Superannuation Industry (Supervision) Act 1993 (SIS Act) and the Australian Securities and Investment Commission Act 2001 so the financial reporting obligations imposed on RSEs are consistent with those that apply to public companies and registered schemes under the Corporations Act. Currently, the requirements in relation to financial reporting and auditing for RSEs are primarily set out in the SIS Act, with some requirements in the prudential standards.
The Bill sets out the following reforms:
- Record-keeping: For income years beginning on or after 1 July 2023, RSEs must keep financial and accounting records for seven years. (The SIS Act currently requires records to be retained for five years.)
- Financial reporting: RSE licensees are currently required to provide APRA with specified information on the entity’s business operations for each year of income and each quarter, in accordance with superannuation reporting standards. The reforms will introduce an additional obligation on an RSE licensee to prepare and lodge with ASIC, for each financial year, financial reports comprising financial statements and notes for the entity, the directors’ declaration and a directors’ report.
- Appointment of auditors: An RSE licensee will be required to appoint an individual auditor (RSE auditor) to conduct an audit of a registrable superannuation entity. The auditor must comply with duties and obligations under both the Corporations Act and SIS Act. Under the reforms, the audit firm or company of which the RSE auditor is a member, employee or director will have obligations in respect of an audit of the entity, such as reporting suspected contraventions. (Currently, an RSE licensee must appoint an RSE auditor to conduct an audit of an RSE under the SIS Act. Audit companies and audit firms are not recognised and have no role or obligations in respect of the audit of an RSE.)
- Auditor reporting obligations: Currently, RSE auditors have an obligation to report suspected contraventions of the SIS Act and Regulations, prudential standards and the APRA data reporting regime. The reforms will impose additional reporting obligations on the audit firm or company of which the auditor is a member, employee or director. Individual auditors, members of an audit firm and directors of an audit company will also be required to report suspected contraventions of the Corporations Act to ASIC.
- Auditor independence: Individual auditors, members of an audit firm, audit companies and directors of an audit company will be subject to auditor independence requirements under the Corporations Act. (Currently, an RSE auditor is subject to auditor independence requirements in the prudential standards, which are substantially consistent with those in the Corporations Act.)
- Auditor rotation: Individual RSE auditors will be prohibited from playing a significant role in the audit of an RSE for more than five successive years. The directors of an RSE or ASIC will be able to extend this for up to an additional two successive years. Before ASIC may grant an approval, it must consult with APRA. (The current requirement is effectively the same, except that any exemption is granted by APRA.)
- Auditor transparency: the reforms will introduce a new requirement that an auditor of an RSE must prepare, lodge and publish an auditor transparency report if the auditor/entity conducts ten or more audits of specified types of entities, including RSEs, during the transparency reporting year.
The reforms are proposed to apply from 1 July 2023.
The Bill does not include any measures in relation to the ‘Super Transparency Report’ mentioned in a press release from the Assistant Treasurer and Minister for Financial Services at the same time the Bill was introduced (see item below in this ASFA Action).
The Bill has been referred to the Senate Economics Legislation Committee for inquiry and report by 25 January. The Committee is seeking any submissions on the Bill by close of business Wednesday 7 December. If you have any feedback you would like ASFA to consider in relation to this measure in the Bill, please forward it to Fiona Galbraith by close of business Friday 2 December.
Taxation of defined benefit pensions: Bill introduced to reverse the Douglas decision
The Government has introduced into Parliament amendments to the tax treatment of certain defined benefit (DB) pensions, to address issues arising from the 2020 decision of the Full Federal Court in Commissioner of Taxation v Douglas.
The Douglas decision found that invalidity super pensions paid under the Military Superannuation and Benefits (MSB) and Defence Force Retirement and Death Benefits (DFRDB) schemes which commenced on or after 20 September 2007 should be treated as superannuation lump sums for tax purposes, rather than superannuation income stream benefits.
Treasury consulted on proposed amendments in July-August (see ASFA Action 861) to ensure that:
- affected veterans retained the income tax benefits of the Douglas decision as well as the resulting benefits of changes in their taxable income
- a non-refundable tax offset applied to prevent any adverse income tax outcomes for affected veterans receiving invalidity pensions that started on or after 20 September 2007
- DB pensions commenced since 20 September 2007 in schemes other than the DFRDB and MSB schemes, that may have been within the wider scope of the Douglas decision, would continue to be taxed as income stream benefits.
The Government has now introduced amendments to address this issue into Parliament in Treasury Laws Amendment (2022 Measures No. 4) Bill 2022.
In addition, the explanatory material notes that it was identified during the consultation that there are some non-military superannuation schemes that have DBs paid on the permanent incapacity of their members that the trustees had identified do not meet the current pension standards in the Superannuation Industry (Supervision) Regulations 1994. Where these pensions commenced to be paid on or after 20 September 2007, the pension payments have been treated as superannuation lump sums for tax purposes. Where this lump sum tax treatment was already in place prior to the Douglas decision, the amendments in the Bill preserve the prior tax treatment for this cohort for the 2021-22 income year or earlier income years to avoid retrospectively imposing a different (and possibly disadvantageous) tax treatment on these individuals.
The Bill has been referred to the Senate Economics Legislation Committee for inquiry and report by 25 January. The Committee is seeking any submissions on the Bill by close of business Wednesday 7 December. If you have any feedback you would like ASFA to consider in relation to this measure in the Bill, please forward it to Julia Stannard by close of business Friday 2 December.
Miscellaneous amendments to Treasury portfolio laws: Bill introduced
The Government has introduced into Parliament the Treasury Laws Amendment (Modernising Business Communications and Other Measures) Bill 2022. This omnibus Bill includes proposed amendments to address several measures of relevance to superannuation funds that have all been the subject of previous consultation and/or previously introduced into Parliament:
- Modernising business communications: Schedule 1 of the Bill contains amendments that were part of Treasury Laws Amendment (Modernising Business Communications) Bill 2022, which lapsed when Parliament was dissolved for the election earlier this year (see ASFA Action issue 842). These include:
- expanding the scope of documents under the Corporations Act 2001 that can be signed electronically
- allowing documents sent under specific chapters of the Corporations Act to be sent in either hard copy or electronic form (this does not include Chapter 7 of the Corporations Act, which deals with regulation of financial services and products)
- ensuring that entities do not need to send any documents required under specified chapters where it knows that it does not have the correct contact details for the intended recipient (as with the above point, this is limited to documents sent under specified chapters of the Corporations Act and will not impact any specific rules in Chapter 7 dealing with disclosures in relation to financial products and services)
- removing from the Superannuation Industry (Supervision) Act 1993 (SIS Act) redundant references to the registrable superannuation entity licensing transition period. As that period expired several years ago, these provisions are no longer needed.
Schedule 1 also contains amendments to clarify that regulatory bodies in the Treasury portfolio can hold hearings and examinations using technology. These were the subject of consultation during August–September, see ASFA Action issue 866).
- Australian Law Reform Commission (ALRC) Financial Services Interim Report: Schedule 2 includes amendments to simplify and improve the navigability of financial services laws as recommended by the ALRC in the first interim report from its review of financial services legislative framework. These were the subject of consultation in August-September (see ASFA Action issue 866).
- Rationalisation of ending ASIC instruments: Schedule 3 contains amendments to transfer longstanding and accepted matters currently contained in ASIC legislative instruments into the primary law. These were the subject of consultation in August-September (see ASFA Action issue 866).
- Miscellaneous and technical amendments: Schedule 4 includes some amendments that were the subject of consultation in September (see ASFA Action issue 867), including:
- updating provisions of the Superannuation Industry (Supervision) Act 1993 (SIS Act) to ensure that notices of relevant decisions by a regulator are published by notifiable instrument instead of by notice in the Gazette
- clarifying that registrable superannuation entity annual member meetings can be held virtually and setting out the notice requirements for physical, virtual or hybrid meetings
- section 117 of the SIS Act – which sets out the circumstances in which a trustee of a standard employer-sponsored fund may pay an amount to a standard employer-sponsor to ensure it captures all governance structures permitted under Part 9 of the Act.
Schedule 4 does not contain these measures that were part of the September consultation package:
- technical amendments to improve the operation of the First Home Super Saver Scheme (FHSSS) ASFA understands these are undergoing further consideration and may still proceed
- amendments prescribing matters that must be satisfied before the Commissioner can pay amounts of ATO held superannuation to a KiwiSaver provider and prescribing the public sector superannuation schemes that can voluntarily pay unclaimed superannuation to the ATO. These were contained in exposure draft regulations are ASFA expects these would be progressed separately to the Bill.
The Bill has been referred to the Senate Economics Legislation Committee for inquiry and report by 25 January. The Committee is seeking any submissions on the Bill by close of business Tuesday 10 January.
Financial Accountability Regime: penalty provisions
Senator Nick McKim, on behalf of the Australian Greens, has circulated amendments to the Financial Accountability Regime Bill 2022. That Bill, together with the Financial Sector Reform Bill 2022, seeks to implement the Financial Accountability Regime (FAR).
The proposed amendments include civil penalties that would apply at the individual level – that is, to accountable persons rather than simply at the entity level. The amendments also include a prohibition on an accountable entity indemnifying an accountable person for the consequences of breaching an obligation under the FAR. Senator McKim had previously recommended, as part of the report by the Senate Economics Legislation Committee into the Bills, the imposition of civil penalties for breaches of individuals’ accountability provisions under the FAR. However, the majority Committee report did not recommend the inclusion of civil penalties at the individual level (see ASFA Action issue 874).
Late last week, the Government indicated it will consult on the potential inclusion of civil penalties at the individual level.
The Bills – which are packaged with Bills to introduce the Compensation Scheme of Last Resort remain before the Senate, awaiting debate.
See ASFA Action issues 874, 871, 868 for background in relation to the FAR.
Expansion of eligibility for downsizer contributions: Bill passed
A Bill to reduce the eligibility for downsizer contributions from 60 to 55 years, which was a pre-Election commitment from both the current and former govts, has now concluded its passage through Parliament. The Treasury Laws Amendment (2022 Measures No 2) Bill 2022 was passed by the Senate without amendments. The amendment will commence on the first day of the first quarter after the Bill receives Royal Assent – this means the commencement date is most likely 1 January 2023.
As reported in ASFA Action issue 871, the Superannuation Legislation Amendment (Broadening Contribution Rules) Regulations 2022 were made in late September. These include amendments to the Superannuation Industry (Supervision) Regulations 1994 and the Retirement Savings Account Regulations 1997 to allow funds and retirement savings accounts to accept downsizer contributions for individuals aged 55 years or over. The amendments to the Regulations will apply from the date the legislative amendments commence.
Increased penalties for data breaches: Bill passed
The Privacy Legislation Amendment (Enforcement and Other Measures) Bill 2022 has concluded its passage through Parliament and is awaiting Royal Assent. As reported in ASFA Action issue 876, the Bill proposes significant increases to the maximum penalties for serious or repeated privacy breaches. It also provides for enhancements to the enforcement powers of the Australian Information Commissioner and the information sharing powers of the Commissioner and the Australian Communications and Media Authority.
Last week the Senate Legal and Constitutional Affairs Committee tabled a report from its inquiry into the Bill, recommending that the Bill be passed with some amendments. These included clarifying the definitions of key thresholds around ‘serious interference’ and ‘repeated’ interference with the privacy of an individual. These amendments were not supported as the Bill progressed through the Senate, on the basis they were better considered as part of the separate, broader review of privacy legislation that is currently underway (see ASFA Action issue 833).
YFYS performance test for faith-based products: proposed modification withdrawn
The Government has withdrawn from the Treasury Laws Amendment (2022 Measures No 3) Bill 2022 a proposed modification to the Your Future, Your Super (YFYS) performance test for faith-based products (see ASFA Action issue 861 for background).
As reported in ASFA Action issue 879, while the majority of the Senate Economics Legislation Committee recommended the passage of the Bill, the Coalition and Australian Greens members of the Committee recommended that the YFYS performance test modification not proceed.
The Government has indicated that removal of the measure from the Bill “will enable the Government to consider the treatment of faith-based superannuation products as part of the broader review of the Your Future, Your Super reforms”.
Late yesterday the House of Representatives agreed to the Senate’s removal of the YFYS measure from the Bill and its passage through Parliament was concluded. The Bill did not contain any other superannuation-related measures.
Increase in penalty unit: Bill passed
The Crimes Amendment (Penalty Unit) Bill 2022, which proposes to increase the amount of a Commonwealth penalty unit from $222 to $275, has been passed by both houses of Parliament and now awaits Royal Assent (see ASFA Action issue 878 for background on this Bill).
Super Transparency Report: Government announcement
The Assistant Treasurer and Minister for Financial Services has announced that the Government will introduce a ‘Super Transparency Report’.
The Government has not yet released any additional detail in relation to the Report, however it has been reported in the media that this it will involve APRA publishing an annual report bringing fund-level expense information into a single document that will include details of donations, directors’ fees, executive remuneration, property fees, investment management costs and marketing expenditure, as well as dividends paid to related parties. The media reports indicate that the Government intends the Report to be in place for the next financial year.
Annual member meeting notice regulations: notice of disallowance motions
As reported in ASFA Action issue 876, a motion by Independent Senator Pocock to disallow the Superannuation Industry (Supervision) Amendment (Annual Members’ Meetings Notices) Regulations 2022 was defeated on 25 October. Those regulations amend the disclosure requirements for registrable superannuation entities’ annual members’ meeting notices.
Subsequently, notice has been given of a further two motions to disallow the regulations, by:
- Independent Senator Lambie – to be moved on 30 November
- Australian Greens Senator McKim – to be moved 10 sitting days after 23 November (it is likely this will be in February 2023 – the 2023 sitting calendar has not yet been released).
An attempt by the Opposition to introduce into the Treasury Laws Amendment (2022 Measures No 3) Bill 2022 amendments that would have effectively reinstated the original annual members’ meeting notice requirements in legislation (rather than regulations) was unsuccessful.
See ASFA Action issues 876, 870, 868, and 867 for background).
APRA to intensify supervision re non-compliance with CPS 234: Information Security
APRA has indicated it will “intensify its supervision of all entities not meeting the Information Security Prudential Standard CPS 234”.
CPS 234 took effect from 1 July 2019 and contains requirements designed to ensure APRA-regulated entities have in place appropriate information security capabilities to be resilient against information security incidents.
Providing the update in the context of advising APRA’s interim response to the recent Medibank Private cyber breach, APRA Member Suzanne Smith said:
“Recent cyber-attacks reinforce the need for ongoing vigilance and focus by boards on operational resilience. They are a stark reminder for boards to ensure they can answer these fundamental questions: Do you know what data you are holding? Do you know where it is? How do you know it is safe? And do you need to retain it?
Cyber security is a highly significant risk area for all regulated entities and we remind banks, insurers and superannuation funds to remain vigilant in order to protect their beneficiaries and the Australian community”.
Updated prudential standards: governance, investment governance
APRA has formally determined two prudential standards relevant to superannuation that will take effect on 1 January.
- Superannuation (prudential standard) determination No. 2 of 2022 revokes Superannuation (prudential standard) determination No. 8 of 2012 and determines an updated version of Prudential Standard SPS 530 Investment Governance. The updated version was finalised by APRA in July and APRA last week commenced consultation on associated guidance (see ASFA Action issues 861 and 879 respectively).
- Superannuation (prudential standard) determination No. 3 of 2022 revokes Superannuation (prudential standard) determination No. 1 of 2016 , and determines an updated version of Prudential Standard SPS 510 Governance. The update to SPS 510 is necessary because several of the existing requirements relating to remuneration will become redundant when CPS 511 Remuneration commences (CPS 511 was determined in November 2021, see ASFA Action issue 836). The amendments to SPS 510 will apply to registrable superannuation entity licensees that are significant financial institutions from 1 July 2023, reflecting the fact that while CPS 511 commences on 1 January 2023, it will apply in stages to different types of APRA-regulated entities
National Housing Infrastructure Facility: broadened remit
The Government has registered the National Housing Finance and Investment Corporation Investment Mandate Amendment (Social and Affordable Housing) Direction 2022.
This instrument broadens the remit of the National Housing Infrastructure Facility (NHIF), to provide flexibility for NHIF financing to be used to attract more private capital into the social and affordable housing sector, including from superannuation funds and other institutional investors.
This implements an announcement made following the Government’s Jobs + Skills Summit in September. Treasury conducted a brief consultation on the amendments earlier in November (see ASFA Action issues 878 and 867 for background).
ASFA REGULATORY WATCHLIST
ASFA’s Regulatory Watchlist (ARW) tracks developments in Legislation, inquiries, consultations
and other regulatory announcements relevant to superannuation.