The superannuation industry was spared major tax reforms in this year’s Budget and—contrary to media speculation—there were no changes to the legislated schedule for increasing the superannuation guarantee contribution rate to 12 per cent.
However, the Budget did contain a diverse range of amendments to superannuation, with keynote reform packages to protect super from erosion and introduce a new retirement income framework. If legislated, these measures will require significant changes to funds’ product offerings.
1. ‘Protecting super’: fees, insurance, inactive low-balance accounts
The Budget contains a major package of reforms under the banner ‘protecting your super’, with measures limiting the fees charged by funds, making insurance opt-in for some individuals, requiring all low-balance inactive accounts to be transferred to the ATO, and expanding the ATO’s activities to proactively re-unite lost and low balance accounts.
The government immediately launched a very brief consultation on legislation to give effect to the reforms (submissions closed 29 May). There is a level of complexity to the proposals, and some inconsistency between the detail in the Budget papers and in the consultation package, particularly in relation to the insurance measures.
Each of the elements of the package will apply from 1 July 2019, and trustees will be required to make a range of disclosure notifications to affected members before the changes take effect and on an ongoing basis.
Changes to insurance in super
The Government will change the insurance arrangements for some cohorts of superannuation members to an opt-in basis. Trustees will be permitted to provide insurance through a choice or MySuper product for the following cohorts only if the member has specifically opted in:
- an account with a balance less than $6,000; or
- a new account for a member who is under 25 years old; or
- an account that has been inactive (no contributions or rollovers) for 13 months or more.
Trustees will be required to notify affected members of the changes by 1 May 2019, allowing them to elect to continue their insurance cover beyond 1 July 2019.
The measure is intended to better target default insurance cover and prevent inappropriate erosion of retirement savings by insurance premiums.
Passive fees capped, exit fees banned
A three per cent annual cap will apply to passive fees charged by superannuation funds on accounts with balances below $6,000. ‘Passive fees’ will be defined to comprise administration and investment fees. Exit fees will be banned for all superannuation accounts, regardless of the balance.
The measure is intended to prevent inappropriate erosion of low balance accounts by passively incurred fees, and remove a disincentive to account consolidation by members.
Transfer of all small and inactive accounts to ATO
Currently, detailed rules require the transfer of certain ‘unclaimed’ superannuation balances to the ATO. These include ‘small’ and ‘insoluble’ superannuation balances held for an individual who meets the definition of a ‘lost member’, amounts for individuals who have reached preservation age but cannot be contacted, and amounts in relation to former temporary residents. A number of complex conditions and exclusions apply to these rules.
In addition to these existing rules, the government is now proposing that all superannuation accounts with balances below $6,000 must be transferred to the ATO if the accounts have been inactive for a continuous period of 13 months.
The ATO will be required to proactively reunite ATO-held superannuation amounts to a member’s active account, where the reunited balance would be greater than $6,000. The Budget papers indicate an intention that the “majority of accounts transferred to the ATO will be reunited in the year they are received”.
The measure is intended to increase the rate of account consolidation, decrease low-balance erosion and reduce duplication of insurance premiums and fees.
2. Retirement income framework
The government has made a number of announcements in relation to a new framework for retirement income.
The government will introduce a ‘retirement covenant’, requiring trustees to formulate a retirement income strategy for superannuation fund members. Trustees will be required to offer Comprehensive Income Products for Retirement (CIPRs)—products that provide income for life—however it will not be compulsory for individuals to take up a CIPR on retirement.
The retirement covenant will be added to the existing covenants (trustee obligations) that the Superannuation Industry (Supervision) Act 1993 imposes in relation to the governance and operation of registrable superannuation entities.
No commencement date has been indicated for this measure. The government will shortly release a consultation paper outlining its proposed approach to the covenant.
Standardised product disclosure metrics
The Corporations Act 2001 will be amended to require providers of retirement income products to report simplified, standardised metrics to assist customer decision-making. No commencement date has been indicated for this measure.
Means testing for lifetime products
The pension means test rules will be amended to encourage the development and take up of lifetime retirement income products to address longevity risk – the risk that individuals will outlive their savings.
The new means test rules will apply to new pooled income streams purchased from 1 July 2019, and will assess a fixed 60 per cent of all pooled lifetime product payments as income. 60 per cent of the purchase price of the product will be assessed as assets until the age of 84 years, or a minimum of 5 years, and then 30 per cent for the rest of the person’s life.
The measure builds on changes to the income stream rules announced in the 2016-17 Budget and introduced with effect from 1 July 2017 via the Treasury Laws Amendment (2017 Measures No. 1) Regulations 2017, and will also facilitate the development of CIPRs.
3. Contributions work test: exemption for recent retirees
An exemption from the work test for voluntary contributions to superannuation will be introduced for people aged 65-74 with superannuation balances below $300,000, in the first year they do not meet the work test requirements. The exemption will take effect from 1 July 2019 and is intended to give recent retirees additional flexibility in their transition to retirement. Existing contribution cap rules will continue to apply to contributions made under the exemption.
4. Super guarantee – preventing inadvertent concessional cap breaches
Individuals with multiple employers and income in excess of $263,157 will be able to nominate that their wages from certain employers are not subject to the superannuation guarantee (SG) from 1 July 2018. The measure is intended to allow eligible individuals to avoid unintentionally breaching the $25,000 annual concessional contributions cap as a result of multiple compulsory SG contributions.
5. Deduction of personal contributions
The ATO will receive specific funding to improve the process by which individuals notify their fund that they intend to claim a tax deduction for their personal superannuation contributions.
With effect from 1 July 2018, the ATO will develop a new compliance model for the ‘notice of intent’ (NOI) process, including changes to tax returns to alert individuals to the NOI requirements and additional guidance to individuals on how to comply. This will ensure deductible contributions are appropriately taxed by superannuation funds and enable the ATO to deny deductions to individuals who do not comply with the NOI requirements.
6. Economic security for women
The Minister issued a media release on Budget night confirming that the government will deliver a detailed ‘economic security statement’ for women in the spring sittings of Parliament. While the Budget papers themselves do not contain any information about this statement, in early May the Minister indicated it will address issues including the superannuation gap and workforce participation.
7. Funding announcements: Treasury, the regulators, AFCA, the Royal Commission
The ATO will receive additional funding (via an increase in its allocation from the supervisory levy collected from APRA-regulated funds) to ensure full cost recovery of its superannuation activities. ATO funding will also be increased to improve the integrity of the processes for individuals claiming personal superannuation contribution tax deductions, and to support the modernisation of payroll and superannuation fund reporting.
APRA and ASIC will receive additional funding, offset by an increase in the supervisory levy, to assist in their involvement in the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry. ASIC will also receive a small allocation to provide a grant to support initiatives to enhance female financial capability. The government will also provide a grant to support the establishment of the new external dispute resolution scheme for financial services, the Australian Financial Complaints Authority (AFCA).
8. Medicare levy – no increase to rate
As announced in late April, the government will not proceed with the 0.5 per cent increase in the Medicare levy proposed in last year’s Budget, to fund the National Disability Insurance Scheme. The proposed increase in the Medicare levy would have had a flow-on impact to the rate of tax to be withheld or paid in respect of certain superannuation amounts. A number of bills before Parliament to implement the increase will now be withdrawn.
9. SMSFs and small APRA funds
The maximum number of allowable members in new and existing self managed superannuation funds (SMSFs) and small APRA funds will be increased from four to six. In addition, the annual audit requirement will be changed to a three yearly requirement for SMSFs with a history of good record keeping and compliance. Both changes will apply from 1 July 2019.
Other measures to note
The Budget also contains a number of measures that do not directly affect superannuation but will have an impact on individuals’ income and/or financial situation in retirement. In particular:
- Measures to support for older Australians – the earnings cap for the Pensioner Work Bonus (earnings that don’t affect Age Pension entitlement) will be increased to $300 per fortnight and the scheme will be expanded to cover to self-employed retirees, and expansion of the Pensions Loan Scheme. The Pensions Loans Scheme (which effectively provides a reverse mortgage) will be expanded to cover all Australians over Age Pension age, and to increase the maximum fortnightly income stream to 150 per cent of the Age Pension rate.
- Changes to personal income tax rates and offsets and Medicare thresholds – a series of amendments will be made to marginal tax rate brackets and to tax offsets for low and middle income earners in three stages over seven years, as part of a ‘personal income tax plan’.
Aside from the Budget there have been a number of other important developments since the last edition of Superfunds:
- ASIC’s powers and penalties – responding to the report from the ASIC Enforcement Review Taskforce, the government has announced it will strengthen penalties for corporate misconduct and boost ASIC’s powers to protect Australian consumers from corporate and financial misconduct. Key elements to the reforms include:
- significant increases to penalties for the most serious criminal offences under the Corporations Act
- expansion of the range of contraventions subject to civil penalties and a significant increase in the maximum civil penalty amounts that can be imposed by courts
- a new power for ASIC to seek additional remedies to strip wrongdoers of profits illegally obtained or losses avoided from contraventions resulting in civil penalty proceedings (‘disgorgement of profits’)
- an increase in ASIC’s powers to ban individuals from the industry and to refuse, revoke or cancel financial services licenses.
The government will consider a number of remaining Taskforce recommendations alongside the final report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.
- New dispute resolution framework – the Minister has formally authorised AFCA as the new external dispute resolution body for financial services. Financial firms—including trustees of APRA-regulated superannuation funds—must become members of AFCA by 21 September and AFCA will commence hearing complaints from 1 November 2018.
AFCA has released details of its inaugural board (including ministerial appointments) and its membership application process. The government has made regulations supporting the new dispute resolution framework and the establishment of AFCA and has confirmed there will be no transfer of open complaints between the Superannuation Complaints Tribunal and AFCA (reversing an earlier announcement).
- Prudential standard updated – APRA has revised its prudential standard SPS 310 Audit and Related Matters, modifying an audit requirement in relation to compliance by a registrable superannuation entity licensee with its operational risk financial requirement strategy.
- Cyber risk and operational due diligence – APRA’s first Insight publication for 2018 details APRA’s expectations on regulated entities in relation to combating cyber risk, and highlights the need for investment managers in superannuation to have robust operational due diligence practices.
- SMSF rollovers – the Minister has indicated that the government will extend the SuperStream regime to allow SMSF members to initiate and receive rollovers electronically between an APRA-regulated fund and their SMSF.