Sharyn Long, Slca 2013

© Sharyn Long, slca 2013

Disclaimer: The material and opinions in this paper are those of the author and not those of The Tax Institute. The Tax Institute did not review the contents of this paper and does not have any view as to its accuracy. The material and opinions in the paper should not be used or treated as professional advice and readers should rely on their own enquiries in making any decisions concerning their own interests.

Sharyn LongSuperannuation Update

CONTENTS

1Introduction

2FOFA Reforms - Licensing

2.1Accountant’s Exemption & Limited Financial Services Licence

2.2Changes to AFS Licensees

3Approved SMSF Auditors

3.1Registration with ASIC

3.2Mandatory Independence

3.2.1Provisions of non-audit services by the audit firm

3.2.2Relationships between auditors and referral sources

3.2.3Firms that offer financial advisory services

4SuperStream Measures

5Changes Impacting Assets in SMSFs

5.1Insurance and Investment Strategy Considerations

5.2ATO Penalty Regime

6Contributions

6.1Additional 15% “contribution charge” for high income earners

6.2Concessional contributions tax refunded for low income earners

6.3Refund of excess concessional contributions up to $10,000

6.4De-minimis amounts disregarded for ECT purposes

6.5TR 2010/1 Superannuation contributions

6.6Concessional contributions cap for over 50s

6.7Allocation of contributions

7Pensions

7.1Draft Pension Ruling TR 2011/D3

7.2Clarification on Exempt Pensions Income after Death

7.3Clarification on Starting & Stopping Pensions

7.4Pension Thresholds

© Sharyn Long, slca20131

Sharyn LongHot Issues in Superannuation

1Introduction

The hardest part of putting a paper together on “the Hot Issues in Super” is deciding what’s hot and what’s not, or more importantly what’s hot for this group of learned tax professionals who don’t necessarily work with superannuation on a day to day basis.

Although self managed super is the focus for many accountants in public practice, wider super reforms impacting large funds as well as employers and members will also beimportant to those of you attending who are not in public practice.

With this in mind, I have attempted to provide a little bit of “Hot Stuff” for everyone.

The Cooper Review[1]concluded in July 2010 and many of the current changes to super are a direct result of recommendations from the Review.

Having said that, there is no doubt that the Labour Government is under some pressure to tip the scales in the distribution of tax benefits away from higher income earning members to lower paid workers. Those in self managed funds are most likely to be impacted by these measures, even if the most recent statistics[2] show that 72% of members in SMSFs earn less than $100,000pa.

But before I address those topics I would like to set the scene with some highlights of where the Australian superannuation industry sits today.

Total estimated super assets reached $1.5trillion in December 2012, the sector breakdown is contained in Table 1.1.

Table 1.1 – Superannuation funds and assets at 31 December 2012

Source – APRA Statistics – Quarterly Superannuation Performance – December 2012

We continue to see the growth of self managed super funds and the contraction in the number of retail, industry and corporate funds.

2FOFA Reforms - Licensing

The Future of Financial Advice (FOFA) reforms impact those providing financial advice and accountants currently relying on the accountant’s exemption to assist clients establish SMSFs.

2.1Accountant’s Exemption & Limited Financial Services Licence

The current accountants’ exemption will be replaced with a Limited Australian Financial Services Licence (Limited AFSL) from 1 July 2016. A three year transitional period will commence on 1 July 2013 until the new limited licence fully replaces the current accountants' exemption from 1 July 2016.

The Limited AFSL will enable accountants to provide a range of financial advice broader than currently available under the current accountants' exemption, including the following:

• Financial advice on SMSFs and a range of superannuation products, securities, simple managed investment schemes, general and life insurance and basic deposit products
• The appropriate type of life insurance cover (i.e. life cover, total and permanent disability (TPD) cover, trauma cover and income protection) and whether the policy should be heldin the superannuation fund
• Recommend and establish an SMSF, make a recommendation about a client’s existing superannuation fund and advise clients on contributions and pensions
• Advice on various basic deposit products (i.e. term deposits, first home saver accounts, etc)
• Advise if a simple managed investment scheme is appropriate for a client (i.e. cash fund vs. equity fund)
• Whether shares are an appropriate investment given a client’s relevant circumstances and risk profile while considering alternative products

The Limited AFSLis expected to be available to professional accountants who hold a public practice certificate and they will not be required to apply for a new licence.

There will be training and professional development standards in order to hold a limited licence to provide certain financial advice.

The most contentious issue relating to the new limited licensing regime is the requirement(or not) to issue a Statement of Advice (SOA). Under the Corporations Act, AFS licensees are required to provide a comprehensive SOA when they provide advice, whereas no such requirement exists under the existing accountant’s exemption. Debate is ongoing and details are still uncertain, but it seems most likely that accountants holding the new Limited AFSL will be required to issue some form of SOA.

With licensing not mandatory until 1 July 2016 and details still uncertain, I would not advocate early registration under the new limited licence – but care should be taken to ensure that you understand the limitations under the existing rules and that you do not provide product advice that falls outside the accountant’s exemption.

2.2Changes to AFS Licensees

In order to operate a financial planning or advisory business, you must hold a full Financial Services Licence (AFSL) or be an authorised representative of an Australian Financial Services Licensee (ASFL).

Amendments to the Corporations Act to pass the FOFA reforms were finalised in June 2012. The key reforms that are summarised below have been optional from 1 July 2012but mandatory from1July2013.

• Impose a “Best Interest” obligation on people giving “personal advice” to retail clients;
• Ban certain conflicted remuneration(including product commissions), where licensees or their representatives provide financial product advice to retail consumers;
• Ban volume-based shelf-space fees from asset managers or product issuers to platform operators;
• Ban asset-based fees on borrowed amounts;
• Impose a 2 year “opt-in” requirement for retail clients; and
• Enhance ASIC’s powers to deal with unscrupulous operators.

Best Interest Duty

The Corporations Act has been amended to impose the following statutory obligations on “individuals” (referred to in the legislation as the “provider”) who provide personal advice:

• to act in the best interests of the client;
• to give priority to the interests of the client in the event of a conflict of interest;
• to ensure that the advice is appropriate; and
• to warn clients if the advice is based on incomplete or inaccurate information.

The amendments also provide for the imposition of civil penalties for breaching obligations to give appropriate advice and warn the client.

Further, the amendments impose a statutory obligation on licensees to take reasonable steps to ensure their representatives comply with the obligation to provide appropriate advice.

These measures apply to “personal advice” and not “general advice” given to “retail clients”.

The reforms do not apply to wholesale clients.

The legislation is framed such that the general obligations on advisors referred to above are supplemented by steps that the advisor can use to prove he or she has taken to satisfy the general obligation. The steps focus on the process of providing advice not justifying the quality of the advice by retrospective testing against financial outcomes.

If a provider wishes to rely on these provisions, the provider must prove that he or she took each of the steps. In case of dispute, it remains for the party taking action against the provider to demonstrate that the provider has failed to satisfy the best interest obligation.

The steps that a provider may demonstrate were taken to satisfy the best interest obligations are:

• The provider must identify the subject matter of the advice sought by the client.
• Once the provider has identified the subject matter, the provider can use this to identify the objectives, financial situation and needs that would reasonably be considered as relevant to the subject matter of the advice.
• Make further inquiries in situations where it is reasonably apparent that the information provided by the client about their relevant circumstances is incomplete or inaccurate.
• The provider must assess if he or she has the necessary expertise to provide advice on the subject matter and if not decline to provide that advice.
• In situations where it is reasonable for a provider to consider recommending a financial product to the client, the provider must conduct a reasonable investigation into the financial products that might achieve those objectives and meet those needs of the client considered relevant to the advice. The provider must assess the information gathered as part of the reasonable investigation.
• The next step requires providers to base all judgements in advising clients on the objectives, financial situation and needs of the client.
• The final step requires that the provider take any step, additional to those above that would reasonably be regarded as being in the best interests of the client, given the client’s relevant circumstances at the time of the advice.

The best interest provisions impose additional obligations on providers, but the provider is not prohibited from receiving remuneration from a third party as long as the provider is able to demonstrate that it is complying with the steps above and is giving paramount consideration to the objectives, financial situation and needs of the client.

Conflicted Remuneration

Payment and receipt of certain remuneration which has the potential to influence the advice licensees provide to retail clients in respect of certain financial product advice has been banned.

Conflicted remuneration is defined in Section 963A of the Corporations Act and means any monetary or nonmonetary (soft dollar) benefit given to a licensee or representative that could reasonably be expected to influence financial product advice, by either influencing the choice of financial product being recommended or by otherwise influencing the financial product advice more generally. Benefits which would only have a remote influence on advice will not be caught.

The ban does not apply to the following monetary benefits:

• General insurance;
• Life insurance which is not bundled with a superannuation product;
• Individual life policies which are not connected with a default superannuation fund; and
• Executiononly (nonadvice) services.

The following nonmonetary benefits are not banned:

• General insurance;
• Benefits under the amount prescribed in regulations (proposed to be $300), so long as those benefits are not identical or similar and provided on a frequent or regular basis;
• Benefits for education and training purposes or information technology software or support, which meet the criteria prescribed in the regulations; and
• Benefits in relation to executiononly (nonadvice) services.

Volume based shelf space fees

A platform operator will no longer be permitted to accept volumebased benefits from product issuers or fund managers for purchase of shelf space or preferential positions on administration platforms.

Fund managers are permitted to lower their fees to platform operators (in the form of scalebased discounts or rebates) where such discounts or rebates represent reasonable value for scale.

Asset based fees on borrowed amounts

Licensees or their authorised representatives will no longer be permitted to charge assetbased fees to retail clients on borrowed amounts to be used to acquire financial products by or on behalf of the clients. A “borrowed amount”can mean an amount borrowed in any form, whether secured or unsecured, including the raising of funds through a credit or margin lending facility.

An “assetbased fee”is a fee for providing financial product advice that is dependent upon the amount of funds to be used to acquire financial products and where a fee is partly dependent on that amount of funds, then it is an asset based fee to that extent.

Where it is not reasonably apparent that the amounts used to acquire financial products by or on behalf of the client are borrowed, then the prohibition does not apply to the fee.

Licensees or authorised representatives can charge assetbased fees on thenon borrowed component.

“Opt-in” and Fee Disclosure Requirements

Where a licensee has an ongoing arrangement with a retail client whereby a fee is payable for a period greater than 12 months, Section 962K of the Corporations Act imposes an obligation on the licensee to provide the client with the following:

• A renewal notice
• A fee disclosure statement

Fee Disclosure Statements

Section 962H introduces the requirement to provide a fee disclosure statement in relation to ongoing fee arrangements. The statement must be in writing, relate to the previous year and be issued within 30 days.

The fee disclosure statement must disclose the amount of each ongoing fee paid by the client in the previous year, information about the services the client was entitled to receive and information about the services that the client actually received.

Provision exists for the Regulations to prescribe additional requirements or exemptions in relation to fee disclosure statements.

Renewal Notice

The renewal notice must be in writing and must include the following:

• A statement that the client may renew the arrangement by giving the licensee an election;
• A statement that the arrangement will terminate and no further advice will be provided if the client does not elect to renew it;
• A statement that the client will be taken to have elected not to renew the arrangement if the client doesn’t give the licensee an election within the renewal period; and
• A statement that the renewal period is 30 days from the time that client receives the renewal notice and fee disclosure statement.

The renewal notice day is defined for new arrangements to be two years from the date of the agreement or two years from the last renewal for existing arrangements.

As an alternative, ASIC has been given the power to exempt advisers from the opt-in provisions where they are bound by a code of conduct, approved by ASIC, which achieves the same outcome.

3Approved SMSF Auditors

3.1Registration with ASIC

From 1 July 2013 auditors wishing to audit self managed super funds will need to be registered with ASIC as an “Approved SMSF Auditor”.

SIS Section 128Apermits any natural person who is Australian resident to apply to be an Approved SMSF Auditor. Registration is an individual requirement and cannot be obtained for a firm or practice as a whole.

ASIC must register the auditor under SIS Section 128B if the applicant satisfies the following conditions:

• the applicant has the qualifications prescribed by Regulation 9A.01 to 9A.05;
• the applicant has the practical experience prescribed by Regulation9A.03 of300 hours of SMSF audit experience in the three years prior to registration or experience ASIC believes is equivalent;
• the applicant has passed a competency exam in accordance with Section 128C (including the requirement to pass the exam in the 12 months prior to the application and not to have failed the exam twice during that period); and
• the Regulator is satisfied that the applicant:

(a)is capable of performing the duties of an approved SMSF auditor;

(b)is unlikely to contravene the obligations of an approved SMSF auditor;

(c)is otherwise a fit and proper person to be an approved SMSF auditor.

Section 128F imposes the following obligations on an Approved SMSF Auditor:

• to complete the CPD requirements prescribed by the regulations; and
• to hold a current policy of professional indemnity insurance, of a level prescribed by the regulations, for claims that may be made against the auditor in connection with audits of self managed superannuation funds; and
• to comply with:

(a)any competency standards that the Regulator determines under section128Q; and

(b)any auditing standards, made by the Auditing and Assurance Standards Board under section336 of the Corporations Act 2001, that are applicable to the duties of an approved SMSF auditor under this Act; and

(c)any auditing and assurance standards, formulated by the Auditing and Assurance Standards Board under section227B of the Australian Securities and Investments Commission Act 2001, that are applicable to those duties; and

• to comply with the auditor independence requirements prescribed by Regulation 9A.06.

Registration has been available since 31 January 2013 and ASIC have warned that applications should be lodged by 30 April 2013 to ensure registration prior to the mandatory date of 1 July 2013.

There are three transitional provisions that apply in regard to auditor registration:

• The first waives the requirement to pass the exam in the transitional period if the auditor has either signed off on 20 audits in the 12 months prior to registration or is a registered company auditor
• The second exempts an auditor who signed off on one audit or is a registered company auditor from satisfying the 300 hours of practical SMSF audit experience in the 3 years prior to registration
• ASIC may register auditors who apply for registration prior to1 July 2013 who are required to sit the competency exam as they completed less than 20 audits, with a condition that they complete the exam by 30 June 2014. Failure to complete the exam by that date would result in cancellation of their registration.

ASIC have published Regulatory Guide RG243 Registration of self-managed superannuation fund auditors[3]which outlines the requirements in greater detail in order to assist auditors through the registration process.

3.2Mandatory Independence

Recommendation 8.9 from the Cooper Review recommended that SMSF auditors be required to adopt a full independence model.[4]