- The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry begins examining the superannuation industry this month.
- Ongoing regulatory change will remain the norm in the superannuation sector.
- Bedding down of super reforms will continue for the next few years
The superannuation sector is being challenged from all sides and regulatory change will continue to be the norm. Tony Negline, Superannuation Leader at Chartered Accountants ANZ, says change is likely to occur at a faster pace than previously and identifies five factors that will bring about significant change.
1. Royal Commission
The evidence presented to the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry so far has captivated the community, even though there have been few real surprises for those who really understand how the financial services industry operates.
What is becoming clear is that, not surprisingly, any form of conflicted remuneration has the potential to create conflicts of interest and that financial penalties for illegal behaviour are thoroughly inadequate.
The superannuation industry has actually not been examined as yet, except in passing. At the time of writing, the examination of super was due to begin in earnest in early August. At the moment, the Royal Commission has a very tight timeframe. It would be very surprising if it wasn’t extended by a year or even more.
The whole purpose of this commission of inquiry is to seek out wrongdoing, work out why it occurred and how best to make it stop. To that end, a raft of recommendations will come out of the commission. The government will then have to decide which ones to implement and how.
2. Productivity Commission (PC) Superannuation Review
The draft PC review into efficiency and competitiveness of the super sector was published in late May 2018. This draft report was a hard-hitting analysis of the super industry, especially in terms of how it deals with default funds for new employees, costs and insurance. No part of the super sector was spared criticism.
The government has already decided to legislate several of the PC’s draft recommendations, such as the following:
* insurance is optional for lower account balances and fund members aged under 25
* exit fees are banned
* smaller account balances must be compulsorily transferred to the ATO, which will have to work harder to find an active account for each small account member.
The Productivity Commission is expected to release its final report before December 2018. The government will need to examine this report and decide what ideas to adopt. Just like the Royal Commission, the repercussions of this Productivity Commission review will be with us for years to come.
3. Triennial SMSF audits
The purpose of the policy is to cut red tape and reduce compliance costs. At the time of writing, this policy was still being designed.
The current plan is for some SMSFs to be eligible to have their fund examined by an external auditor only once every three years. It will not be compulsory for SMSF trustees to use this policy. They can elect to retain an annual audit.
Some administrators and agents now use auditors to locate processing and paperwork errors. What practical change will the three-year audit create for fund administrators and tax agents? Logically, it would seem reasonable that this cannot continue for funds only receiving an audit every third year.
A range of funds will not be eligible to use the three-year audit approach. For example, those that lodge their annual returns late or had a compliance breach (this is yet to be fully defined). In addition, funds with certain types of transactions, such as related-party transactions, collectibles or artwork and so on.
At present, it is difficult to specifically know how many funds will fall out of this policy or, put another way, how many will be allowed to be audited once every three years. The government says it does not want to decimate the SMSF auditor ranks, so it will be interesting to see how this policy is implemented.
4. Bedding down 2016-17 super reforms
SMSFs have only now completed their first annual returns that apply these new rules. There is still quite a bit of confusion about how best to operate under the rules and I think the bedding down process and revealing of unintended consequences – which only come about through learned experience – will continue for the next few years.
5. Non-arm’s length income provisions
If amending legislation is passed, two changes will apply from 1 July 2018:
· Non-arm’s length expenses (whether revenue or capital in nature) incurred by a superannuation entity in gaining or producing assessable income result in such income being deemed not to be on an arm’s length basis and hence will be subject to the non-arm’s length income penalty tax.
· If the right to income from a trust through a fixed entitlement was acquired on a non-arm’s length basis, then similarly the non-arm’s length penalty tax will apply.
Importantly, these will changes apply to arrangements put in place before and after their commencement date.