21 August 2015
Speech - #2015010, 2015

‘The future of super’, Address to The Tax Institute, Sydney

Check against delivery

Introductory remarks and acknowledgements

Good morning – it’s a pleasure to be with you.

It is great to see a room full of people who are at the coal face of helping Australians with their superannuation.

Can I say that your Institute, the Tax Institute, is recognised in Canberra as an expert body of tax advisors: accountants, lawyers and those working in the corporate sector. The Institute has in the past and continues to participate positively in policy discussions and submissions on draft legislation and tax rulings, and I thank you for that.

Superannuation assets continue to grow strongly. The pool of assets under management has grown to over $2 trillion.  That’s up by more than 14 per cent from March last year.1 Contributing to this, are Self-Managed Superannuation Funds (SMSFs) which hold over $580 billion in assets.2

Superannuation is a key part of building retirement income for all Australians.  Yes, there is an Age Pension and people might also have other savings, but saving through superannuation helps to supplement the amount of income people have once they stop working. 

You will all be aware of the projections for people to live longer.  You will know the Intergenerational Report’s finding that by 2054-55 the ratio of working-age people to retirees will be 60 per cent lower than it is now.3

The Government understands the importance of superannuation and knows that it is essential to help Australians build a strong retirement income. As superannuation assets are projected to grow to over $9 trillion by 2040, the Government has a responsibility to deliver a robust policy framework which benefits all Australians in saving for their retirement.

The policy framework is critical to you as legal advisers, financial planners, accountants and fund managers.  So in the first part of my speech today, I’d like to provide an update on some major reviews that may impact on the superannuation sector. I’ll speak about tax reform; the Government’s response to the Financial System Inquiry report, the Income Streams Review and briefly touch on the Johnson Review.

I’d then like to speak to you about some specific legislative and administrative developments with implications for various industry sectors.

I’ll end my speech by talking about some changes that have been taking place at the Board of Tax and their implications for policy development.

Major reviews

Tax reform

All of you would be aware that the Government is currently reviewing the tax system. We have been considering submissions received in response to the discussion paper, Re:think, and developing a green paper with options for tax reform. Responses to this options paper will inform the shape of the Government’s white paper. The options paper is expected to be released later this year with the white paper released for consideration by the Australian people before the election.

As the Treasurer has noted, there is significant support for tax reform across the community.

The Government extended the deadline for comments on Re:think to allow an additional opportunity for stakeholders to express views on the particular issues related to the system.

The Government has now received over 870 formal submissions since the launch of the Re:think paper.  Of this, around 470 submissions are from individuals and around 400 from organisations.

Over 300 submissions discuss retirement income issues, including the relationship between superannuation and the Age Pension and other issues relating to ageing.

Not surprisingly, we have heard divergent views on the need for reform – some support major changes, such as changes to the tax concessions associated with superannuation, while others are strongly in favour of stability and consider that the current arrangements are appropriate.

There are also proposals to change the rules on contributions to superannuation, especially to increase the flexibility of the caps. Submissions also indicate that there is considerable interest in facilitating catch-up contributions by people with broken work patterns.

The recent ANZ Women’s Report and public discussion raised the issue of women’s superannuation balances and the fact that Australian women earn on average $700,000 less than men over a 45-year career. The tax reform process gives us the opportunity to see if there is anything more that can be done, particularly around the flexibility for contributions.  There is also a new reference to the Senate Economics Committee for an Inquiry into ‘Economic security for Women in Retirement’ for report by the first sitting day in March 2016. This Inquiry will provide a targeted opportunity to examine these issues.

Finally, there has been some discussion in the tax white paper process to date regarding the relationship between superannuation and other aspects of the retirement income system – including the Age Pension; treatment of non-superannuation savings; and whether there is scope to facilitate home equity release and downsizing.

As you can appreciate, these are all complex and sensitive issues and will require careful consideration to ensure that any changes do not give rise to unintended consequences.

We should also always remember that despite calls for changes to the system, stability and confidence are particularly important where people are investing for many years, with the expectation that the rules at the time they invest will not be changed before they retire. This is why the Government is so strongly committed to not making any unexpected, adverse changes to superannuation during this term of Parliament.

We need to think carefully before making further changes to the system and ensure that any changes are implemented in a way that meets the Government’s desire for  a better tax system that delivers taxes that are lower, simpler and fairer. 

The Tax White Paper process allows us to gather everyone’s ideas. The next stage, the options paper later in the year, will allow further community consultation on possible reforms.

Financial System Inquiry

The second review I would like to talk about is the Financial System Inquiry that was chaired by Mr David Murray.

As you would be aware, this report made some significant recommendations that were intended to strengthen the superannuation system and improve outcomes for members particularly with respect to retirement income products.

Retirement income products

The Financial System Inquiry identified that the post-retirement stage of the superannuation lifecycle is underdeveloped compared with the accumulation stage. In other words, funds had a strong focus on the accumulation phase but have not been as innovative as possible on the issue of how they can best sustain their members in retirement. He also pointed out some limitations with account-based pensions – while these are simple and flexible, they are less suited to managing longevity risk.

We know from the Intergenerational Report that Australians will live longer and continue to have one of the longest life expectancies in the world.

A greater proportion of the population will be aged 65 and over, with the number of Australians in this age group projected to more than double by 2054-55 compared with today.4 Given these challenges, Murray recommended that trustees should offer all members comprehensive income products for retirement, or CIPRs. These would comprise a combination of underlying retirement income products, such as an account-based pension, coupled with some form of a longevity product.

These portfolio products should enable retirees to balance three desired features of retirement incomes products: that they (1) provide adequate income; (2) manage risks, particularly longevity risk; and (3) provide flexibility – for example, to withdraw lump sums to meet unexpected expenses.

Submissions to the FSI and my discussions with industry have supported this focus on the retirement phase of superannuation.

Such a change could be significant for the superannuation industry and will therefore require extensive consultation before being implemented.

Income streams review

This issue is also being addressed in Treasury’s Income Streams Review – which implements another of the Government’s election commitments. This process is looking at ways to ease current restrictions on the development of retirement income products.

The aim is to provide more flexibility for innovation and to allow industry to develop the type of products that may form part of retirement income streams in the future.

At present, only a very limited range of annuities qualify for the tax exemption on assets supporting retirement income products.

Under the proposed new rules, concessional tax treatment would be extended to a wider range of products.

Treasury has been working closely with stakeholders on a proposal for a new alternate set of rules. The Government will consider the results of this, with a view to announcing a package of changes later this year.

While the details have yet to be finalised, at this stage it is not envisaged that SMSFs would be able to provide products under the proposed new rules. 

These changes will lay the groundwork for opening up new products along the lines envisaged in the Final Report of the Financial System Inquiry.

Johnson Review

Speaking of implementing reviews, I’d like to briefly mention the Government’s progress on the recommendations of the 2010 Johnson Review of Australia as a financial services centre. I am personally committed to implementing the Johnson recommendations. We have put in place a new investment management regime (IMR) framework. This should encourage greater foreign investment. We also want to do more to promote financial services exports. The Asia Region Funds Passport initiative is crucial in this regard. It will reduce regulatory barriers to cross-border offerings and create a single regional market for managed funds. I progressed this on my recent visit to Japan and Korea. We will also be designing new collective investment vehicle (CIV) structures that will be more attractive to foreign investors.

The Government will shortly introduce legislation to modernise the tax system for managed investment trusts and improve the international competitiveness of Australian managed funds. This legislation will also include a change that will make it easier for superannuation funds to invest through a trust, without the trust attracting corporate tax treatment. This should help reduce compliance costs because the trust will be able to apply the standard trust tax rules.

In addition to these ‘big picture’ reviews, there are other ways in which the Government and the ATO are trying to make things easier for the superannuation industry.

SuperStream

You would be aware that SuperStream was intended to simplify the process of making contributions and reduce costs for funds.

I understand from the ATO that all funds are now SuperStream compliant and more than 250,000 employers are now making contributions via SuperStream.

The focus now is on spreading benefits to smaller employers. I’m aware that this has been a controversial issue, with many in the industry complaining of the costs involved.

The challenge now is to ensure that we maximise the benefits from this expenditure – driving lower costs for both funds and employers.

ATO Diagnostic

The ATO is also trying to help large funds to meet their member reporting obligations through production of tailored diagnostic reports. These reports allow funds to self-assess, identify and improve any issues relating to their reporting obligations to the ATO.

For the first time the Diagnostic Reports have been provided to the sector during July and August 2015 and early feedback has them being well received in supporting the ATO’s help and assist approach.  They also show good levels of compliance. This is a great achievement.

MySuper CGT rollover relief

Finally, in June I announced an extension of MySuper CGT roll-over relief to transfers of MySuper balances within a superannuation fund.

Affected superannuation funds must transfer an estimated $53 billion dollars in assets as we complete the transition to MySuper up to 1 July 2017.

Tax relief in the form of a deferral will be available where funds transfer assets as a consequence of transferring their default members’ balances to a MySuper product within their fund structure.

Without this measure, approximately 2.5 million members would have been worse off.

This announcement provides certainty for the industry, and allows funds to make the necessary transfers of assets without the concern of negative tax implications.

It’s another example of how we are listening to industry concerns and taking action to remove unnecessary costs.

Self Managed Superannuation Funds

I’d now like to turn to discuss SMSFs.

SMSFs are a great feature of the Australian superannuation system – they promote engagement and competition in the market. Currently SMSFs account for around one third of all superannuation funds under management. As of March this year, there were over 550,000 SMSFs with over one million members. This is up five per cent from the previous year.5 

There are several ways in which the ATO is trying to help trustees satisfy their obligations.

Borrowing

An issue of particular relevance to SMSFs is the recommendation in the Financial System Inquiry on leverage.

David Murray’s report has recommended a complete ban on limited recourse borrowing arrangements in the superannuation sector.

I am sure this issue is something a number of you have a keen interest in.

It would obviously be inappropriate for me to pre-empt what the Government proposes to do on this issue, as it forms part of the broader Government response to Murray. However, I do want to emphasise that we have been considering the issue carefully. We want to make sure the approach we adopt is proportionate to the risks identified.

We have all heard unhappy stories of property spruikers providing inappropriate advice to people, encouraging them to start up SMSFs in order to gear up and buy a flash new apartment off-the-plan. Then the property price plummets or the rent dries up, and the member is left either wiping out their super balances by liquidating other assets, and possibly losing the family home they’ve offered up as a personal guarantee. There may also be liquidity issues when funds move into pension phase.

Where this happens, it is clearly troubling.  But these stories are very much the exception, not the rule.

The available statistics on limited recourse borrowing arrangements, while not perfect, tell us that limited recourse borrowing arrangements remain a very small proportion of SMSF assets, and are more often invested in commercial property than in residential high-rises.

Forty-two per cent of limited recourse borrowing arrangements – or around $3.5 billion – were invested in residential property in mid-2013.6  To put this in context, that means that only 0.07 per cent of Australian residential property – perhaps 6,500 dwellings – were held by an SMSF through a limited recourse borrowing arrangement in 2013.7

Leverage always carries risks.  Lenders recognise this in their loan to valuation requirements.

And while we do not intend to ignore these risks, we need to make sure that our response is proportionate to the problem the FSI identified.

Assisting Self Managed Super Funds

The Government recognises that the majority of SMSF trustees try to do the right thing with regards to their compliance with the superannuation laws.  The ATO, together with the SMSF industry and professional associations, are looking to assist trustees comply with their obligations by providing them with timely access to information that is relevant for them, at a time when it is most suitable for them.  This includes:

  • on-line education packages for SMSF trustees created in partnership with professional associations;
  • short on-line SMSF trustee videos;
  • SMSF Assist, which allows users to type specific SMSF questions online or into an app, and receive information relating to that topic when they need it;  
  • a subscription SMSF News service that includes case studies, legislative information and common question and answers.

Professionals are also supported in providing services to their clients.  SMSF auditors have been provided with an express resolution service called ‘professional to professional’ and free software to help them complete audits and work through scenarios and case studies.

The methods that are in place ensure that we have enough support mechanisms available to help not only the large funds, but SMSFs as well.

Changes to the Board of Taxation

Finally I would like to mention the Board of Taxation. The Board has recently undergone some changes in membership, with a new Chair, Mr Michael Andrew.

Many of you would know Michael from his previous role as the global CEO and Chairman of KPMG, a position he held until 2014.

A number of new members were also appointed, some I note with a connection to the Tax Institute.

In the past, the main role of the Board has been to undertake detailed reviews of issues, including post-implementation reviews referred to it by government. That work continues to pay dividends.  One example is the recent review of tax impediments to small business where the Board identified some good opportunities for simplifying the tax system.   

You may not be surprised to learn that the Board drew attention to the superannuation guarantee (SG) charge as a big concern for small business. The Government shares the Board’s concerns and we are implementing changes to make the SG charge simpler and fairer.

While it will continue to perform its review function, the Government is also keen for the Board to play a more active real time consultation role. The Board’s consultation with business on issues arising from the Re:think discussion paper illustrates its role in bringing a business and community perspective to contemporary tax policy development.

The Board will also be consulted on the exercise of the proposed “statutory remedial power”. This power will allow the Commissioner to make a legislative instrument to ensure that tax and super laws do not operate in a way that is inconsistent with policy.

The Board also plays an important role as the Government’s Ministerial Advisory Council on tax deregulation.  In fulfilling this role, ideas and feedback from business and community stakeholders, such as yourselves, is vital as it will help inform priorities for repeal days and ATO administrative changes.

An area where this is working in practice is Fringe Benefits Tax laws.  This is an area where, based on strong business community feedback, the Board has identified an opportunity for simplification, developed preliminary reform options and has a working group to further develop simplification opportunities.

These experiences have already demonstrated that the Board brings a different emphasis to tax policy. 

Conclusion

In closing, I would like to thank the Tax Institute for inviting me here today.

We are on the cusp of widespread tax and financial services reform and we will need your continued input to ensure these changes meet their desired policy objectives.

I also encourage you to continue to advocate publicly for tax reform. Reform will be achieved only if there are strong voices explaining the need for change.

I look forward to working with you as we move into this exciting period.


1 APRA, Quarterly MySuper statistics (21 May 2015)

2 ATO, Self-managed super fund statistical report – March 2015 (20 May 2015)

3 2015 Intergenerational Report - Australia in 2055, March 2015, page viii

4 2015 Intergenerational Report - Australia in 2055, March 2015, page viii.

5 ATO, Self-managed super fund statistical report – March 2015 (20 May 2015)

6 ATO, Self-managed super fund statistical report – March 2015 (20 May 2015)

7 Ibid