Labor Senators Report
1.1
The Labor members
of the Committee support the intention behind the Superannuation Industry
(Supervision) Amendment Regulations 2004 (No 2) (“the regulations”), to prevent
the use of the SMSF and small APRA fund structure (“small funds”) for tax
avoidance, estate planning and other purposes not related to providing
retirement incomes. Nevertheless, Labor
does not believe that the regulations, 9A and 9B, which together prohibit a
fund with less than 50 members providing a defined benefit life time pension,
is the appropriate manner with which to deal with the tax, estate planning and
other abuses that are possible under the current law.
1.2
The Labor members
of the Committee support the first part of these regulations as set out in the
Schedule 1, which provide that contributions to accumulation funds must be
allocated to a member of a fund and that benefits in an accumulation fund be
fully vested in a given member. The
relevant regulations deal with the avoidance they seek to regulate in an
appropriate and directed manner with no effect on those small funds that do not
engage in the targeted abuse.
1.3
Labor does not
support those parts of the regulations that prohibit funds of less than 50
members paying defined benefit lifetime income streams.
1.4
The original
stated rationale for introducing Divisions 9B and 9A are to prevent:
-
tax minimisation
through RBL compression; and
-
the use of
defined benefit pensions for estate planning purposes.
1.5
The way in which
tax minimisation and estate planning is effected is set out in the report.
1.6
Labor agrees that
the law as it exists provides some opportunity for both tax minimisation and
estate planning but it is concerned that neither Treasury nor the Tax Office
could produce any figures to indicate the level of occurrence of these
activities and the purported loss to revenue.
1.7
Labor is
concerned that with the exception of IFSA and Treasury, all other witnesses
believed that the regulation 9.2A and 9.2B were poorly drafted and went beyond
what was necessary to prevent the abuse they were aimed to prevent. It was also generally agreed that the
regulations could be redrafted in a fairer and more targeted manner to achieve
the same end.
1.8
Labor takes it
seriously that such a significant majority of those individuals and
organisations involved in the superannuation industry, though clearly in favour
of steps being taken to close the loopholes currently being exploited by a
minority in the industry, are opposed to the current form of the regulations.
1.9
An additional reason
for prohibiting the payment of defined benefit pensions in small funds, doubts
to whether small funds are able to guarantee a lifetime income stream, was
raised at the hearing by both IFSA and the Department of Treasury.
1.10
IFSA and Treasury
raised the issue of investment risk because they were concerned that a small
fund did not have the ability to diversify risk in the manner of a large fund
and consequently bad investment decisions would mean that there might be
insufficient funds to meet a defined benefit obligation.
1.11
After considering
this argument Labor takes the view that the personal nature of small
self-managed funds, that is, the fact that the members and trustees are one and
the same and control the investments of the fund, makes the situation different
from that of the large fund where the trustees manage the fund’s investments on
behalf of the members.
1.12
In these
circumstances, Labor believes that if the members of the small funds are
prepared to take this risk, effectively with their own money, they should be
permitted to do so.
1.13
Treasury also
raised a secondary concern arising from the possible inadequacy of funds to pay
a lifetime income stream - a resulting drain on the social security system
because of the need to pay the age pension to small fund members whose funds
had failed through bad investment.
1.14
Labor takes the
view that the number of members of small funds who might find themselves in
this position is very small and would have an insignificant impact on
revenue. Labor would point out that
alternative term income streams may also result in a recipient having
insufficient funds at the end of the term and being forced onto a full or part
age pension.
1.15
Another argument
that has been raised, again by IFSA and Treasury, is that of the level playing
field. The view taken by these bodies
is that because the members of large funds have to purchase a life-time income
stream, ensuring the members of small funds must do so creates a level playing
field by putting them in the same position as the members of large funds.
1.16
There are two
problems with this argument. First, it
will not create a level playing field as there remain many fund members in
large defined benefit funds who do not have to purchase an income stream from a
financial institution. Secondly, small
fund members will find themselves burdened with two sets of fees; the costs of
running their small fund plus the costs that will be payable to the financial
institution from which they must buy a lifetime income stream.
1.17
According to witnesses
at the hearing only four organisations provide a lifetime pension. It is not a very competitive market and it
can be anticipated the costs of commercial lifetime income streams will be
subject to a raft of fees, charges and commissions.
1.18
Labor is also
extremely concerned about the uncertainty for small fund members if regulations
9.2A and 9.2B stand. They are faced with
the uncertainty as to what in fact the rules for lifetime pensions will be, not
only in the immediate future but also in the long-term.
1.19
Although the
existing regime is grandfathered and the date of implementation of the new
rules extended until 30June 2005, the uncertainty that exists about the future
is confusing. There is one set of
regulations for those already receiving lifetime income streams. Another for those planning to retire before
30June 2005 provided their fund contains appropriate clauses permitting it to
pay a lifetime income stream. The new rules
will apply after 30 June 2005 but the planned post election review may recommend
alternative regulations.
1.20
This degree of
uncertainty for those planning to retire both in the long and short-term is
totally unacceptable.
1.21
Labor believes
that proposed new regulations 9.2A and 9.2B should be disallowed until such
time as the review has been conducted.
In the meantime Labor believes the Tax Office has the power under Part
IVA to deal with abuses in relation to tax avoidance. Labor also believes the proposed review
should be broadened to cover all possible abuses of small funds and to make
recommendations regarding reforming the system to make it safe from abuse.
Senator Ursula
Stephens
Deputy Chair