Example 2 – Australian resident in the PLS

Joe comes to Australia for 4 years on a 403 visa issued prior to 4 April 2022 under the PLS to pick fruit and nuts in rural and regional locations. Joe is an Australian resident for tax purposes in Australia.

Joe works at a cherry farm in Wangaratta, Victoria. He is paid $21 per hour and guaranteed 10 hours for 6 days each week. As Joe is an Australian resident, his employer will withhold tax from his salary and wages based on the resident tax rates. Joe’s weekly salary is calculated as:

$21 per hour × 10 hours × 6 days = $1,260 per week

His employer withholds tax and an amount for the Medicare levy = $251 per week

Joe’s take home pay each week is $1,009

Joe is required to lodge a tax return at the end of the tax year.

Source: Australian Taxation Office, Seasonal Worker Programme and Pacific Labour Scheme

However, foreign workers in the PALM visa scheme are currently generally taxed as non-residents, at a tax rate of 32.5% for the first $120,000 earned, 37% for income earned between $120,001 and $180,000, 45% for income earned over $180,000.[74]

What are the problems that the Bills seek to address?

As noted above, the PALM visa scheme consolidated, reformed and replaced the SWP and PLS visa schemes. This means the PALM scheme will seek to attract similar Pacific and Timor-Leste workers to those under the previous SWP and PLS visa streams to work in all sectors of Australia’s economy.[75] However, these groups of foreign workers, who perform similar work (with some differences across the three programs), are taxed differently, depending on the type of visa they hold.

The Government argues that the higher tax rates currently applied to visa holders under the PALM scheme will discourage workers’ participation in the program and therefore mean the program would defeat its dual purposes of addressing Australia’s workforce shortages and maintaining good relations with participating nations by helping the Pacific and Timor-Leste workers to send homes savings and remittance.[76]

In addition, the current legislation does not have the flexibility to allow the Australian Government to, by regulations, provide concessional taxation rates to future visa programs for foreign workers. Instead, the Government needs to amend the legislation to apply concessional tax rates each time a new visa program is introduced.

Who will the Bills effect?

As at 31 July 2022, there are 26,500 workers in the PALM visa scheme.[77] The Government has stated that ‘there are currently more Pacific and Timor-Leste PALM scheme workers in Australia than there have ever been before’.[78]

There are also 40,108 pre-screened workers awaiting job offers from approved PALM scheme employers as at 31 July 2022 (see Figure 1 below).[79]  

Figure 1: Distribution of workers

Source: PALM, Expanding, 2.

As at 31 July 2022, there are 387 PALM approved employers.[80] Employers will also be impacted by the measures proposed in the Bills as they are required to withhold the correct tax rate using the PAYG withholding system and claim the correct deduction amounts for salaries, et cetera. 

Key provisions

Schedule 4 to the Main Bill and Schedule 1 to the Supporting Bill will rename the current ‘Seasonal Labour Mobility Program withholding tax’ regime as the ‘labour mobility program withholding tax’ regime.[81] Further, the Main Bill defines a labour mobility program as including:

• the Seasonal Labour Mobility Program
• the Pacific Australia Labour Mobility (PALM) program and
• any future program(s) that the Government prescribes by regulations.[82]

The effect of the other amendments in Schedule 4 to the Main Bill and Schedule 1 to the Supporting Bill is that foreign workers

• participating in a labour mobility program
• will pay an income tax rate of 15% on the salary, wages, commission, bonuses or allowances received as an employee of an Approved Employer when they held a relevant temporary work visa and was a foreign resident.[83]

This would mean that from 1 July 2022 foreign workers under the new PALM scheme visa will receive similar taxation treatments as those under the SWP visa scheme.

Ability to apply concessional tax rates to future new labour mobility programs

The Main Bill also ensures that any future Government can expand the concessional tax treatment by applying it to new types of visas via regulations, rather than being required to amend the Income Tax Assessment Act 1997.[84]

The Explanatory Memorandum argues:

This will increase flexibility to update the tax law in response to future changes, such as changes to program names or the creation of new programs for foreign residents for which this tax treatment is appropriate. It will also allow flexibility to update the tax law in response to changes to visa names by regulations.

This will provide the Government with the necessary flexibility to make timely changes to tax arrangements to support the success of Australia’s existing and future labour mobility programs. The regulations would be subject to disallowance and therefore will be subject to appropriate parliamentary scrutiny.[85]

These amendments were not included in the lapsed Treasury Laws Amendment (Enhancing Tax Integrity and Supporting Business Investment) Bill 2022 introduced by the previous Morrison Government.

Commencement of changes to taxation of relevant visa holders

The Supporting Bill commences on 1 July 2022 and the amendments in Schedule 4 to the Main Bill will either commence at the same time, or do not commence at all, if the Supporting Bill does not commence.[86]

The amendments apply retrospectively in relation to salary, wages, commission, bonuses and allowances paid on or after 1 July 2022. The Explanatory Memorandum notes that the retrospective amendments are ‘wholly beneficial to or do not disadvantage anyone affected by the amendments’ due to a lower income tax rate applicable to the foreign worker employees and a lower withholding tax rate applicable to the employers.[87]

Key issue 1: Horizontal equity

One of the criteria of good tax design is ‘horizontal equity’. The notion of horizontal equity requires taxpayers in the same position be taxed the same.[88]

In that regard, the Bill raises two horizontal equity issues.

The first – which the Bill seeks to address – is ensuring that workers in the PALM visa stream, the Seasonal Labour Mobility Program (or SWP) and other future similar programs, pay the same rate of tax (15%). If there are no changes to the current tax arrangements, workers in the PALM scheme will pay more than twice the amount of the income tax (32.5% as a starting rate) than workers in the SWP (15%), and such a difference in tax treatment under the two visa schemes may appear to be unfair.

The second – which the Bill does not address – is that the measures in the Bill, if passed, would result in non-resident workers without a labour mobility program or Working Holiday Maker (WHM) visa being taxed at a higher rate than non-resident workers that do hold those visas, even if they are performing the same work for the same employer.

Whilst not explored in detail in this Digest, prior to the introduction of the ‘backpacker tax’ for WHM visa holders, taxation-related proposals reflected a view that it was appropriate to tax foreign workers on short-term visas on the same basis, regardless of the sector they worked in or the type of visa that they held.[89]

As such, a key issue raised by the Bill is whether it is appropriate to tax foreign workers on short‑term visas working from specific countries:

• in the same manner as other non-residents foreign workers or
• on a more concessional basis compared to other non-residents workers.

Readers are referred to the Bills Digest that was written for two lapsed Bills for further details on this issue.[90]

Key issue 2: Australia’s strategic objective with the Pacific and Timor-Leste nations

The Australian Government has indicated its intention to run the PALM scheme with the aim of producing a ‘win-win’ outcome for both Australia and the partnering nations.

If the seasonal workers in the PALM scheme are taxed at a higher starting rate of 32.5% as a foreign resident, there is a danger that the PALM scheme would fail its dual purposes of

1. addressing Australia’s workforce shortages,[91] and
2. maintaining good relationships with the Pacific and Timor-Leste nations.[92]

Committee consideration of the related key issue

Joint Standing Committee on Foreign Affairs, Defence and Trade

In its March 2022 report, the Joint Standing Committee on Foreign Affairs, Defence and Trade recognised the growing importance of labour mobility schemes in the enduring Australia-Pacific relationships. The Committee recommends that such schemes be built on to support career development, build relationships, and provide pathways to permanent residence. [93]

Recommendation 2 of the report states the following.

The Committee notes the growing importance of the Pacific Australia Labour Mobility scheme for skills transfer and training and as a source of remittance income, and the support for such programs amongst the Pacific. The Committee recommends the Australian Government:

• pursue steps to scale-up the program, better support career development, and provide pathways for permanent residency, akin to those being developed for the Agriculture Visa Scheme; and

• explicitly recognise the relationship building and cultural exchange elements of the Pacific Australia Labour Mobility Scheme in its design and promotion.[94

Policy position of non-government parties, independents and major interest groups

The PALM scheme and its expansion have attracted some media attention. For example, ABC News recently reported that farmers have traditionally relied on backpacker labour for planting and harvest work but, since the pandemic, working holiday-makers are yet to return in the same numbers.[95]

Bree Grima, the chief executive of Bundaberg Fruit and Vegetable Growers, said that made it even more critical the Pacific workers are supported: 

If it wasn't for [the Pacific workers], we simply would not have been harvesting our crops or planting our crops either… We've had some brilliant numbers come into Queensland and into regional areas, a lot more than we've had before. So we need to make sure that the workers that are here, that are keen to stay here, that they've got the support mechanisms to ensure that they've got that work available for them.

There's a lot of work and time and effort that goes into becoming an approved employer, and there should be... It is a difficult process to go through but I do support that it does do a lot of background checks and ticks a lot of boxes. These workers, they are highly skilled, they're putting a lot into the community, and we need to make sure that we're looking after them in every aspect.[96]

ABC News also reported that the unions and employers in the aged care sector considered the extension of the PALM scheme to include aged care as a positive move but warned that there would be minimal impact:

• CapeCare chief executive Joanne Penman was reported to have said that the full-time [Fijian] workers had made a huge difference, working with the non-for-profit aged care provider for four months.  
• Australian Nursing and Midwifery Federation (ANMF) federal secretary Annie Butler was reported to have said overseas-trained workers had long formed a significant part of Australia's care and nursing workforce and the expansion of the scheme could have a positive, yet limited impact.
• Aged and Community Care Providers Association interim chief executive Paul Sadler was reported to have said Pacific Island workers would fill a limited portion of the empty roles.
• South Sea Islander worker welfare advocate Geoffrey Smith was reported to have said a lot more work to address Australia’s history of mistreatment of people from South Pacific Islands was needed before expanding the program.[97]

The concerns reflected in the last point above are consistent with the historical prevalence of underpayment or non-payment of wages and other unlawful employment arrangements in the agricultural sector and are examined in detail in the Bills Digest to the lapsed Income Tax Amendment (Labour Mobility Program) Bill 2022 and the Income Tax Amendment (Labour Mobility Program) Bill 2022.[98]

Financial implications

Schedule 4 (Main Bill) and Schedule 1 (Supporting Bill) partially implements the Pacific Labour Mobility – reforms measure from the previous Government’s 2021–22 Mid-Year Economic and Fiscal Outlook.[99]

The Government estimates that the measure will increase receipts by $165.0 million over the then forward estimates period.[100]

All figures in this table represent amounts in $ million.

Source: Explanatory Memorandum, 4.

These estimates reflects the tax that was expected to be paid at the proposed rates by workers participating in the new Pacific Australia Labour Mobility scheme and the expansion of the Pacific Labour Scheme. This estimate includes an increase in goods and services tax receipts of $50.0 million over the then forward estimates period that will subsequently be paid to the states and territories.

Compliance cost impact

The Government has stated that this measure ‘is expected to result in a negligible impact on compliance costs, as the proposed taxation arrangements are consistent with existing taxation arrangements for other labour mobility programs’.[101]

Schedule 5 (Main Bill): Faith-based products

The Bill proposes amendments to the Superannuation Industry (Supervision) Act 1993 (SIS Act) to establish a supplementary performance test for faith-based superannuation products.

Performance test for MySuper products

MySuper products were introduced in 2013. They were designed to be a simplified superannuation accumulation product, into which contributions are paid if the employee either nominates the product or does not express a choice about which fund their superannuation contributions are paid into.[102] That is, they are intended to be simple, cost-effective and balanced investment options eligible to receive default contributions.[103]

In 2018, the Productivity Commission conducted a review of Australia’s superannuation system (the PC Review) which made a number of findings relevant to the introduction of the performance test:

• many Australians have low financial literacy and are disengaged from their superannuation[104]
• holding superannuation in one of the worst performing funds could mean a person retired with a significantly lower superannuation balance
• high fees also eroded final superannuation balances.[105]

The Treasury Laws Amendment (Your Future, Your Super) Act 2021 introduced a performance test for MySuper products to hold superannuation funds to account for underperformance through greater transparency and increased consequences. The Australian Prudential Regulation Authority (APRA) conducts the test each year.

There are two components to calculating the performance measure:

• the net investment return of a product over the past 8 years (actual return) is compared to a benchmark return and
• the product’s representative administration fees and expenses (actual RAFE) for the most recent financial year is compared to the median RAFE (benchmark RAFE).[106]

The benchmark return is a passive investment portfolio of indices tailored to the product’s reported strategic asset allocation. As noted in the PC Review, using a benchmark portfolio to assess investment performance aims to account for the many influences on investment markets which are beyond funds’ control, while providing insights into the value added by funds.[107] The issue of selecting an appropriate portfolio of indices is examined below in the ‘key provisions and issues section’.

Recent test results

The performance text was applied to MySuper products from 1 July 2021, with 13 products failing the performance test in 2021.[108] Of those, 2 belonged to funds with clear religious affiliations (Australian Catholic Superannuation and Retirement Fund and Christian Super).[109] The performance test looks at results over 8 years meaning some newer funds committed to investing along ‘ethical’ or ‘socially responsible’ principles were not tested. A values-based investment fund, Australian Ethical’s MySuper passed the performance test by 132 basis points.[110]

The 2 Christian funds which offered products which did not pass the performance test in 2021 have since merged with other funds.[111] There have also been further mergers of other Christian funds.[112] According to the Financial Standard, this only leaves 2 religious funds – Anglican Super (managed by Mercer) and Crescent Wealth.[113]

Key issues and provisions

The ALP made an election promise to ‘allow APRA to take into account the religious affiliation of a super fund when applying the recently-introduced performance benchmark.’[114] Schedule 5 of the Bill implements this commitment.

What is a faith-based product?

Proposed section 60K defines a faith-based product as one specified in the determination made by APRA. In turn, proposed section 60L prescribes the information an entity would need to provide to APRA in order for its product to be classified as a faith-based product. As part of this process the trustees of the entity must apply to APRA to make a determination that a product is a faith-based product. In making such an application, the trustees of the entity must:

• declare that the investment strategy for the product accords with faith-based principles
• declare that they have:
  • disclosed the investment strategy to beneficiaries of the product and
  • disclosed (and in the future disclose) the investment strategy in marketing materials and
• provide to APRA one or more indices which APRA could use to assess the product’s performance
• provide any additional information as specified in the regulations.

The Explanatory Memorandum notes that regulations may provide that an application must contain:

• the trustee’s investment strategy, which includes the product’s faith-based principles
• the product’s Product Disclosure Statement
• a copy of any advertising materials disclosing the product’s faith-based investment strategy and
• the time at which the product adopted its faith-based investment strategy.[115]

Treasury has released an Exposure Draft of the Regulations which set out the information that will be required to be disclosed.

As part of a consultation process undertaken by Treasury on the Exposure Draft of the Bill,[116] some stakeholders expressed concerns about the proposed definition of a faith-based product, based on the definition being ‘circular’, lacking detail and not being clear.[117]

In relation to how the proposed definition of a faith-based product could be improved, some stakeholders suggested:

• applying ‘quantifiable criteria’ such as considering on a look-through basis whether the products invest in companies that earn above a certain percentage of their revenue from activities not inconsistent with their faith-based filters[118]
• that the Bill or regulations give ‘explicit guidance on expectations of a faith-based product. Where this is limited to religious principles… this should be made explicit’[119] and
• drawing on legal definitions of ‘religion’ and/or the Australian Bureau of Statistics’ Australian Standard Classification of Religious Groups.[120]

Key issue: creating a supplementary performance test

Under the existing Part 6A SIS Act framework, if a MySuper product fails the performance test, a number of consequences will apply:

• APRA must publish the fail result on a website maintained by APRA (see subsection 60C(5) of the SIS Act)
• trustees must notify beneficiaries of the fail result using a notification letter prescribed by regulations (see section 60E of the SIS Act) and
• for two consecutive fail results, trustees are prohibited from accepting new beneficiaries into the relevant product (see section 60F of the SIS Act).

Schedule 5 of the Bill amends the SIS Act to provide for a supplementary annual performance test for faith-based products. If a faith-based product fails the original performance test, none of the above consequences will apply.[121] Instead, APRA must assess the product against the supplementary performance test. The trustee of the faith-based product only experiences the consequences of a failed performance test if it fails the supplementary performance test.[122]

For the current performance test, APRA is required to calculate a benchmark return for a product using assumed indices set out at regulation 9AB.17 of the Superannuation Industry (Supervision) Regulations 1994. The appropriateness (or inappropriateness) of those indices is examined below.

However, for the supplementary test, APRA may use alternative indices for faith-based products.[123] Proposed subsection 60P(5) provides that regulations may specify requirements relating to the supplementary performance test. In turn, proposed subsection 60Q(4) provides that such regulations may include requirements relating to APRA determining appropriate indices for a faith-based product.

The Explanatory Memorandum notes that in deciding on alternative index or indices, APRA will consider whether an alternative index or indices reflects the faith-based investment strategy, and it is anticipated that APRA will consider the indices included in the application for faith-based status.[124]

Exposure Draft Regulations relating to the supplementary performance test for faith-based products were released on 12 September 2022. In summary, the Exposure Draft regulations would:

• allow APRA to make a determination specifying alternative assumed indices for the covered asset classes in the table in regulation 9AB.17 of the existing regulations
• requires APRA to consider the suitability of any of the indices provided in the application for faith-based status when determining alternative assumed indices for the product. In deciding on an alternative index or indices, APRA will consider whether the provided alternative index or indices reflects the product’s faith-based investment strategy.[125]

However, the draft explanatory statement notes ‘it is not expected that APRA will investigate all available indices or propose alternative indices in making a determination.’[126] In addition, as currently drafted, the proposed regulations do not appear to enable APRA to create customised indices by removing any investments that were excluded from a faith-based product from otherwise appropriate indices.

As such, it does not appear that the proposed supplementary performance test addresses the issue of the lack of appropriate indices used as the basis for both the current performance test and the proposed supplementary test, as discussed below.

Key issue: lack of appropriate indices

Stakeholders raised a number of concerns about the existing operation of the current law with regards to appropriate indices by which to measure MySuper product performance, as well as in relation to the proposed indices for faith-based products.

Current use of indices in the performance test

As noted above, each MySuper fund is required to benchmark each product it offers to a portfolio of listed market indexes that reflects the asset allocation of the product.[127]

Whilst not explored in detail in this Digest, APRA provides information and guidance on how it selects appropriate indices by which to measure the performance of MySuper funds.[128]

For example, where a MySuper product invests in:

• Australian equities, the S&P/ASX 300 is used as the index
• Australian Listed Property, the S&P/ASX 300 A-REIT Index is used as the index and
• International Fixed Interest, the Bloomberg Barclays Global Aggregate Index (hedged to AUD).[129]

In turn, where a MyProduct invests in more than one category, relevant indices are combined with appropriate weighting to provide an overall appropriate index.[130]

Several stakeholders have previously expressed concerns about not only the indices used to measure MySuper product performance, but how they are selected and how many are used, including:

• ‘Given the seriousness of the consequences of the ‘underperformance’ test, the proposed test will drive trustees to make investment decisions effectively to ‘hug the index’. This is in conflict with the objective of delivering good member outcomes over the medium to long term’[131]
• ‘the performance benchmark test will cost consumers because it will constrain super funds from constructing portfolios which are in the members’ best interests’[132]
• ‘The question has been raised as to whether the benchmarking approach potentially is in conflict with members’ best interests and member outcomes, as it measures the returns of assets in a particular class against the index for that class, a measure of investment efficiency, but does not take into consideration the strategic asset allocation or risk of the investment portfolio underlying the product.’[133]
• ‘An increased number of indices will better capture the intended implementation of the trustees and therefore the fund’s ability to deliver against relevant benchmarks. Fewer indices will result in an assessment that captures more than a fund’s ability to deliver on their planned implementation. Such an outcome could result in some good performing funds failing the test whereas some poorly performing funds could pass the test.’[134]

Further, some stakeholders have previously expressed support for a second test be developed for funds or products which fail the initial performance test.[135]

These concerns are relevant to the measure proposed by the Bill as a key area of concern for stakeholders is the use of indexes, how they are selected and the non-availability of alternative mechanisms to measure performance not only of faith-based MySuper products, but others as well.

Concerns about appropriate indices for faith-based products

The Jefferson and Shea Group (JSG) noted that superannuation funds and products which offer investment strategies reflecting the religious faith and values of their member base have a distinct nature and different principles from other products.

JSG noted such funds and products ‘have a clear mandate from members to express these values in the way the fund invests’ and this usually results in ‘specifically customised’ funds and products that generally follow one or more of the following investment forms:

• portfolio construction – diverging from a market-cap benchmark weighting of portfolio assets to favour (upweight) assets neutral or more aligned with faith principles and exclude (‘screen out’) or down-weight other assets less aligned with faith principles
• active ownership – holding assets in order to exercise voting rights and seek to engage with a company to improve performance on issues relevant to faith values and
• impact investing – investing (sometimes in partnership) in organisations which have specific social benefit or otherwise non-financial goals, along with financial goals. Financial goals in this context may be given a longer timeframe to be achieved and/or be held to a lower priority. Considerable due diligence is performed by funds in order to support specific impact investment initiatives.[136]

JSG provided examples of how the above can influence the performance of faith-based MySuper products:

• a large cap US equity portfolio applying a Catholic Values screen had materially different weightings to the top 3 sectors relative to the S&P 500 Index – Information Technology (44 bps overweight), Health Care (92 bps underweight) and Financials (62 bps overweight)

• a large cap Europe, Australasia and Far East (EAFE) equity portfolio applying a Catholic Values screen had materially different weightings to the top 3 sectors relative to the MSCI EAFE Index – Financials (51 bps overweight), Industrials (65 bps underweight) and Health Care (190 bps underweight)

• the MSCI World ESG Leaders Index had several materially different sector weights to the MSCI World Index, including a 113 bps overweight to Communications Services and a 130 bps underweight to Utilities.

Collectively, these intentional faith- and values-driven portfolio biases create annual return differences to their respective agnostic benchmarks of 84-104 bps over the short term and 11-45 bps over longer term horizons, in one asset class alone.[137]

As a result, JSG and other stakeholders indicated that it may be difficult or almost impossible to find suitable indices to benchmark funds against, or that the current system used to compare the performance faith-based products that apply faith-based screening to investment decisions to other superannuation products that don’t isn’t ‘comparing apples with apples’.[138]

For example, in their submission Haven Wealth described systemic problems with the evaluation of values-based investments:

One of Haven Wealth Partners’ biggest frustrations is that our high conviction ethical approach is classified ‘responsible’ just the same as the investment product built on the bare minimum screening to achieve the same ‘responsible’ classification. To date, ratings and certifications in this area tend to be binary rather than depict the level of commitment toward screening. That said, we are aware of developments in this space.[139]

As noted above, the Exposure Draft of the Superannuation Performance Test Treatment of Faith‑based Products – Regulations 2022 does seem to address this problem by giving APRA the power to determine an alternative index for comparison (proposed regulation 9AB.18A(2)(d)).

However, whilst this would allow APRA to develop alternative indexes, the draft regulations to not appear to able to address the excluding of certain industries entirely from indices used in the performance test, to better reflect faith-based investment decisions. Some stakeholder argued that this would an objective performance comparison to be made, whilst better reflecting the faith-based investment strategy of the relevant product.[140] For example, RIAA argued:

for asset class where the product’s investment strategy varies significantly because a faith-based approach excludes a number of investments, ‘ex-screening’ indices could be determined. For example, for Australian equities this could be the S&P/ASX 300 reweighted to remove any investments that were excluded for that product.[141]

Financial implications

The Explanatory Memorandum to the Bill states that there are no financial implications arising from the provisions in Schedule 5 of the Main Bill.[142]

However, if people retire with lower superannuation balances, it can reasonably be expected that they will rely more heavily on the Age Pension. The PC Review suggested that the difference between a low performing fund and a high performing fund could be as much as $502,000 over a lifetime.[143] This is equivalent to at least 8–10 years’ income in retirement.[144]

Position of major interest groups

There were 15 submissions to Treasury’s Exposure Draft of the Bill. Stakeholders uniformly supported choice in superannuation products, however, none of the submissions supported the proposed changes unreservedly, with some arguing strongly against the creation of a ‘two-tier’ system.

Stakeholders that would be directly impacted by the reforms (that is, entities involved in faith‑based investment services) appear to favour reforms to the existing performance test or changes to the proposed supplementary performance test that would allow industries excluded from faith-based or values-based products to be removed from indices used in either test, to better reflect faith-based or value-based investment decisions.

Most stakeholders appear to favour including the proposed changes in the wider Review of Your Future, Your Super Measures, particularly as similar changes are likely to be extended to other funds with a values-based investment philosophy and with submissions from bodies supportive of proposed changes indicating that further changes may be necessary.[145]

Separately, Margaret Cole of APRA said that the annual performance test was ‘driving change and improvements for members.’ She also stated that while APRA was supportive of review, it was for others to decide if further parameters should be added to the performance test.[146]

‘Equity’ of the current performance test and proposed supplementary test

Stakeholders raised different views about the equity of introducing a supplementary performance test for a single category of MySuper products (faith-based products). 

The Industry Superannuation Australia submission argues:

The Government’s proposal to provide differential treatment to faith-based products – by giving these products two attempts to pass the performance test – potentially undermines the intention of the test. In particular, it creates an uneven playing field between faith-based products and other superannuation products, including products that are also applying values-based investment principles (such as those that are marketed as being ethical or socially responsible) … To the extent unintended and perverse outcomes arise as a result of applying the current performance test benchmarks to faith-based products, the same issue is likely to exist for other products, including those that apply values-based investment principles.

Accordingly, ISA recommends that the treatment of faith-based products be considered as part of the Government’s broader review of the Your Future, Your Super reforms later this year. Committing to specific changes for faith-based products ahead of that review is premature and appears to add an additional layer of complexity to the review that could otherwise be avoided.[147] [emphasis added]

In contrast, the Association of Superannuation Funds of Australia argues:

If a product has made a ‘values-based’ or ‘principles-based’ decision not to invest in one or more assets then it is not appropriate to assess that product against a benchmark that includes the performance of those assets. Instead, the benchmark should be adjusted by removing those assets and the product assessed against the adjusted benchmark… By way of example, if a product has decided not to invest in tobacco products, or armaments, or gambling, because of the deleterious effect on public and individual health, the relevant benchmark(s) should be adjusted by removing the performance of those products from that benchmark.

Further, establishing a paradigm in which a product ‘fails’ the original, unadjusted, performance test, and is then assessed against a ‘supplementary’, adjusted, performance test, creates the impression that the product has ‘failed’ but has been granted special treatment, in the form of a concession, to be assessed against another test. We submit that this should not be the case – instead a product should be assessed against a single, appropriate, benchmark in the first place to determine whether it has succeeded in delivering appropriate outcomes to members.

Accordingly, we suggest that, in lieu of a ‘supplementary’ performance test, ‘values-based’ or ‘principles based’ products should be assessed against a performance test that has been adjusted to take into account the filters/screens that the trustee has put in place and whether that product has passed or failed in delivering appropriate outcomes to its members is determined on the basis of that assessment.[148] [emphasis added].

JSG argued that ‘there is no compelling policy reason for penalising a faith-based investment strategy for underperforming an agnostic performance benchmark’.[149]

Haven Wealth Partners noted that the proposed reforms are in part aimed at making sure faith-based investment products receive a ‘fair and reasonable’ performance assessment given the additional complexity of their product design and the customers which they serve.[150]

Likewise, in their submission Crescent Wealth said:

Whilst the proposed changes to the Act are welcome; we urge and recommend that given the nature, processes and extra costs of faith based funds, that further and expanded amendments to the Act be considered … We believe such further changes … will assist in creating a more level playing field for faith based funds.[151]

Other issues raised by stakeholders

As noted above, other issues raised by stakeholders included:

• whether these changes should be considered as part of the wider Review of Your Super, Your Future Measures currently being undertaken by Treasury
• that similar conditions would be extended to other values-based products and
• the effect that a separate test would have on the amount of superannuation people retired with.

Table 6 below summarises stakeholder responses around those issues.

Table 6: Summary of stakeholder responses against three of the major themes

Source: Treasury, Superannuation Performance Test Treatment of Faith-based Products, Submissions.

Appendix A: Relevant statistical data for Schedule 1 (Main Bill) Foreign acquisitions and takeovers penalties[152]

The Foreign Investment Review Board (FIRB)has been publishing annual reports on insights into foreign purchases and sales of residential real estate since 2017–18 when the Register of foreign ownership of residential land (the Register) was introduced. FIRB also publishes data on the number of approvals and applications processes each financial year in their annual reports.

The most recent version of the Register covers transactions by financial year from 2017-18 to 2020-21. These figures only cover residential property transactions over each period, there is no data on foreign ownership levels in this report. It should also be noted that foreign persons in this report do not include permanent residents, who do not require FIRB approvals for residential property purchases. Figures for purchases and sales are provided down to the state level.

Figure 2: Four-year comparison of purchase transactions by state or territory

Source: FIRB, Register of foreign ownership of residential land: Insights into foreign purchases and sales of residential real estate 2020–21, 7.

Over the 4-year period covered by the Register, Victoria has reported largest number of foreign purchases of residential property, followed by NSW. The number of purchases has fallen steeply over the COVID-19 period, with all the states/territories except for the ACT, NT and SA showing an overall reduction in purchase counts in 2020-21 when compared to 2019-20.

Figure 3: Four-year comparison of sale transactions

There was an increase in sales counts when compared to 2019-20 in all states and the ACT.

Source: FIRB, Register of foreign ownership of residential land: Insights into foreign purchases and sales of residential real estate 2020–21, 9.

For sales, there have been much smaller numbers of transactions prior to 2020–21. In contrast to purchases, COVID-19 led to a spike in foreign owner sales of Australian residential property, and there was an increase in sales counts when compared to 2019-20 in all states and the ACT.

The Property Council of Australia publishes quarterly figures on the proportion of property sales to offshore investors by property sector, including residential property. These figures are based on surveys of real estate professionals (around 750 respondents) as part of the ANZ/Property Council Survey, so the figures are not based on direct observation. The definition of offshore investors is broader than the definition of foreign investor used by the FIRB. The latest data shows a strong downward trend in the estimated proportion of residential property sales to offshore investors.

Figure 4: Proportion of survey respondents’ property sales to offshore investors, by sector (Data correct for June Quarter 2022)

Source: Property Council of Australia, Property sales to offshore investors by asset type, ANZ/Property Council Survey.

Appendix B: Schedule 4 (Main Bill) - comparison between the current schedules and their corresponding schedules in lapsed Bills