Self Managed Super: Issue 44

PEOPLE HEARING WITHOUT LISTENING

The pace of super reform has been rapid in 2023 with the government putting forward a number of key proposals impacting the SMSF sector and calling for stakeholder input on those. Yet, as Jason Spits writes, that feedback has had little impact on changing what bills enter parliament, prompting the question: Is the government actually listening to the industry?

Superannuation has been a big ticket item this year with the federal government’s legislative agenda resulting in significant media coverage and forcing the SMSF and tax sectors to respond to a series of significant and unprecedented changes.

After starting the year with the lingering issue of non-arm’s-length expenditure (NALE) on the table, the government announced its plans for a resolution of that issue as well as a number of other measures. These included legislating an objective for superannuation and an additional earnings tax for total super balances over $3 million, and it is still sounding out its plans for the introduction of payday super and how the sector can boost its retirement income stream products.

It also found time to revise the franking credits framework, introduced a ‘blink or you’ll miss it’ amendment in the Senate to rules related to tax agent whistleblowing as part of its response to audit failures at PWC, approved the experience pathway for advisers and announced moves to introduce half of the recommendations of the Quality of Advice Review.

Representative bodies from the SMSF and tax sectors lined up repeatedly to provide input on the superannuation changes and put forward modifications or even alternative models they argued would maintain equity and fairness across the system.

Yet, looking back they have had little success, with the government pushing ahead with many of its initial positions unchanged by the time they reached parliament.

Limited time by design

One observation across these events appears to be how limited the time has been for the government to seek input on the changes (see The government’s legislative timeframes below), particularly where they impact the SMSF sector.

For instance, the initial consultation period for the proposed objective of super was 30 working days, which dropped to 23 for the NALE revisions and then down to only 10 working days for the initial consultation period set aside for the $3 million soft cap.

The two latter measures have a proportionally higher impact on SMSFs than Australian Prudential Regulation Authority (APRA)-regulated funds, which have been exempted from the NALE rules.

“There has been a trend to short consultations on key measures this year compared to the past where they usually ran for at least four weeks,” SMSF Association chief executive Peter Burgess says, singling out the very short initial and draft bill consultations for the new tax on total super balances over $3 million, which will be known as the Division 296 tax when it becomes law.

“We think this has led to poor policy in regards to the taxing of unrealised capital gains as well as the absence of the accompanying regulations when the bill was introduced into parliament, and it was difficult to consult properly without those.

“The shorter consultation periods also show us the way forward for government and we have made our points clearly because it is obvious to us the SMSF sector will be paying the price for these changes.”

The haste of the government has also been of concern to Institute of Financial Professionals Australia head of superannuation and financial services Natasha Panagis who sees it as part of a wider plan by the government.

“This year has felt like the government has a to-do list that it wants to get done as soon as possible. If we look at the objective of superannuation and Division 296 tax consultations, not all the details came out and we came to expect not to see any changes in the bills entered into parliament,” Panagis notes.

“Even with the NALE consultation, despite having more time, we did not see a better outcome than the two-times factor which appeared in the May budget, and it comes down to whether the government is listening and taking on what the industry is saying.”

It is worth mentioning governments are also subject to the parliamentary cycles and process in enacting their policy agenda and that was a key factor in the timing of the Division 296 tax, according to Chartered Accountants Australia and New Zealand superannuation and financial services leader Tony Negline.

“Between the initial announcement in February and its inclusion in the May budget, the government wanted to finalise the estimate for future revenue forecasts and was then able to reconsider the design of the bill,” Negline explains.

“How governments listen to industry on matters like this is also tied to the parliamentary process and who will support it in the house, but if they can make legislative decisions and get them through without change, not many governments are going to stop doing that.”

More than a to-do-list

While the legislative and parliamentary process is an accepted part of the proposed and finalised changes introduced this year, there is a perception more is going on, which stems not just from the timeframes involved but also the growing separation in legislation of the treatment of SMSFs compared to APRAregulated funds.

Panagis points out the exemption of APRAregulated funds from the NALE rules and the choice of calculating the Division 296 tax seem to be pitched against SMSFs and will create a two-tier superannuation system.

“The government has said these approaches are the easiest way to reduce costs, but simplicity should not trump equity. The issue is not about paying extra tax but about fairness,” she adds.

“We get the feeling APRA-regulated funds have the ear of government and the NALE rules and Division 296 are a raid by government on SMSFs.”

Panagis is not alone regarding this view, with Institute of Public Accountants technical policy general manager Tony Greco recognising that despite many hours of dealing with the government, the SMSF sector has found little success in lobbying for change.

“We do wonder why the government does not appear to be listening. The Division 296 tax is an issue for at least 80,000 people, but there was little time to consult, no feedback and no changes in the draft legislation,” Greco says.

“The superannuation sector spent a lot of time making submissions and we can appreciate the issues for APRA funds in calculating the tax, but it is SMSFs who will be primarily impacted. The government knows this but sees it as a small level of resistance and feels like it can get away with it.

“It is like a casino play for the government, they can’t lose and SMSF fund members can never recoup what they will lose under this tax.”

Saying what needs to be said

Given it appears the cards were stacked against SMSFs from the start, one needs to ask whether there was any value in investing hundreds of hours in researching and writing submissions and meeting with Treasury and government representatives when the pay-off has been so low.

Negline believes there was and regards it as vitally important industry bodies and professional associations engage with government on all issues relevant to their members and the wider public.

“We are custodians of the superannuation sector and because of our background and experience we look after it for practitioners and their clients. Governments change so we advocate in the public interest and try to protect the system because we know how it works and point out to them the impact of their changes,” he says.

“Our job is to go on the record and state what works and what could change. It is not productive to beat up the government, but we have to be critical if need be.”

Burgess agrees with Negline’s position and reveals there was some positive movement on the issues the SMSF sector opposed.

“With the NALE changes, the two-times factor that will be applied is an improvement from the tainting of all expenses first proposed and the five-times factor presented in February,” he says.

He adds the treatment of defined benefits pensions under Division 296 is an issue raised by the sector and will be addressed by regulations that are still to be released.

Despite this, he does see the government overlooking the value and benefit of the SMSF sector in its current legislative plans. He points out SMSFs are meeting the desired goals of the superannuation system, with members continuing to be highly engaged, and with 90 percent of retired members having already moved their balances into pension phase – an area the recently announced superannuation in retirement consultation will aim to improve for APRA-regulated funds.

“Our research, conducted by Rice Warner into the costs of running an SMSF, showed they are not just for those with large balances and we know SMSF members are investing for the social good and are getting into infrastructure and public housing investments,” Burgess says.

“We are aspirational when it comes to super and the government wants to encourage people to build their retirement savings. SMSFs are a useful and recognised part of that solution, but it appears their success is overlooked and they are being targeted with different tax structures.”

Panagis adds the changes of the past year no longer feel as if they are addressing issues within superannuation, but are following a path to dampen the appeal of SMSFs.

She notes the total number of funds continues to grow and 1.125 million people are in SMSFs holding $851 billion in assets, which is about a quarter of total superannuation assets, and they remain a popular choice for a growing number of new members.

“We don’t believe the government is seeing the success of the SMSF sector and states it does not want to change it but it seems the ‘negative issues’, like NALE and large balances, are being given more attention to tarnish their appeal,” Panagis claims, adding this won’t deter further engagement on issues with government.

“Our aims are to drive good policy ideas with the government and we will do that again with our pre-budget submission next year. Our approach this year appears to have been negative, but many of the policy issues have been negative to start with."

While noting the limited changes from consultations in 2023, Greco and Negline say the SMSF sector will not be stepping back from continuing to question new policies and advocate for proactive changes where they are required.

“This year does paint a picture of what the future will look like and while we have not been able to score a win with government this year, we accept they have a mandate and will work with them in good faith seeking good outcomes,” Greco says.

Negline highlights much of the advocacy work this year has synchronised across industry bodies, including the Joint Action Working Group, which includes accounting, tax, advice, and superannuation associations, and individually and collectively they are preparing for the next issue.

“We are, all the time, looking at what can be done. Every group is weighing up who to talk with and how to achieve our policy objectives and adjusting strategies as things progress and develop,” he explains.

“There were two main policies that did not go our way this year, and while that may not give any insight into what happens in 2024, we will enter an election cycle in the second half of the year.

“We know the government is closer to the large APRA-regulated funds than to the SMSF sector, but it has not shut the door on us and we still have good relationships with ministers, Treasury and the regulators.

“The government is also aware SMSFs have more than 1 million members who are engaged with their super and we saw how those members, when it came to franking credits in the 2019 elections, were a key part of Labor’s loss.”

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The government's legislative timeframes

The legislative agenda for superannuation, tax and financial advice matters has been full this year with the government choosing tight deadlines for comments at the initial consultation and draft bill stage. While most periods for feedback averaged about three working weeks, the shortest timeframe was two working weeks, or just 10 days, for the initial consultation on the Division 296 tax for total super balances over $3 million. Conversely, the longest period of nine working weeks, or 46 days, has been set aside for the recently announced consultation into how the superannuation system can better support members with retirement income products and services.

Non-arm’s-length expenditure (NALE)

The issue of NALE precedes the current government and has its genesis in the non-arm’s-length income (NALI) changes. The policy commenced in mid-2018, however, the application of the NALI provisions to general expenses remained unresolved at the start of this year.

Initial consultation period: 24 January to 21 February 2023 – 23 working days Draft bill consultation period: 19 June to 7 July 2023 – 15 working days

Status: introduced into parliament on 13 September 2023, currently before the Senate.

Objective of superannuation

Initial consultation period: 20 February to 31 March 2023 – 30 working days Draft bill consultation period: 1 to 29 September 2023 – 21 working days

Status: Introduced into parliament on 16 November 2023, currently before the House of Representatives.

$3 million soft cap

Initial consultation period: 31 March to 17 April 2023 – 10 working days

Draft bill consultation period: 3 to 18 October 2023 – 12 working days

Status: Introduced into parliament on 30 November 2023, currently before the House of Representatives.

Payday super

Initial consultation period: 9 October to 3 November 2023 – 20 working days

Status: Draft bill yet to be released.

Superannuation in retirement

Initial consultation period: 4 December 2023 to 9 February 2024 – 46 working days

Status: Draft bill yet to be released.

Education standards for experienced advisers

Initial consultation period: 18 April to 3 May 2023 – 11 working days

Status: Introduced into parliament on 14 June 2023, passed 6 September 2023.

Quality of Advice Review recommendations

Initial consultation period: 14 November to 6 December 2023 – 17 working days

Status: Draft bill yet to be released.

Tax Practitioners Board reforms in response to PWC

Initial consultation period: 20 September to 4 October 2022 – 11 working days

Draft bill consultation period 18 November to 11 December 2022 – 16 working days

Status: Introduced into parliament on 16 February 2023, amendments accepted in Senate without consultation 15 November, passed 27 November 2023.

Franking credits – off-market buybacks

Initial consultation period: 17 November to 9 December 2022 – 17 working days

Status: Introduced into parliament on 16 February 2023, passed 27 November 2023.