Introduction
2.1
This chapter examines stakeholder views on the provisions of the Treasury Laws Amendment (2022 Measures No. 3) Bill 2022 (the bill) and related bills. It draws on both the submissions received, as well as evidence heard by the Senate Economics Legislation Committee (the committee) during the public hearing in Canberra on 18 October 2022.
2.2
This chapter provides an indicative, although not exhaustive, account of the key issues relating to the bill and concludes with the committee’s views and recommendations.
2.3
The vast majority of evidence received for the inquiry through submissions and the public hearing pertained to Schedule 5 of the bill; as such, discussion in this chapter is constrained mostly to comments related to that schedule.
Support for a faith-based measure
2.4
As the Minister highlighted in his second reading speech, people of faith often seek to live out their faith in every part of their lives. In harmony with this objective, people of faith should be able to participate in our superannuation system in a manner aligned with their faith-based principles, without compromising on performance standards.
2.5
According with the above proposition, most inquiry stakeholders were generally supportive of the intent of the bill—that is, to allow for investment in agreement with faith-based principles to be considered when assessing the performance of a superannuation product. However, stakeholders varied in their level of outright support for the bill in its current form.
An adjusted performance test
2.6
The Association of Superannuation Funds of Australia (ASFA) were of the strong opinion that if the performance of a superannuation product is to be assessed as to whether it has delivered appropriate outcomes to its members, that test should reflect the objectives underlying its investment strategy, including any filters or screens put in place that limit ‘investible universe’ of that product. In other words, ASFA took the view that the performance test should constitute a singular ‘adjusted’ test, rather than a two-phase supplementary test.
2.7
Dr Martin Fahy, Chief Executive Officer (CEO) of ASFA, restated this point during the public hearing:
We think that if a product has made a values-based decision not to invest in one or more assets then it is not appropriate to assess that product against a benchmark comprised from an index that includes the performance of those assets. Instead, as we've said, the benchmark should be adjusted by removing the performance of those specific assets, and the product should be assessed against the adjusted benchmark.
…
[W]e suggest that, in lieu of a supplementary performance test, values-based or principles-based products be assessed against a performance test that has been adjusted to take account of the filters and screens that the trustee has put in place, and that whether that product has passed or failed in delivering appropriate outcomes to its members be determined on the basis of that single assessment rather than a two-phase assessment.
2.8
Chartered Accountants Australia and New Zealand (CA ANZ) and CPA Australia expressed similar concerns, suggesting that the performance test should benchmark superannuation products (whether they be faith-based or otherwise) against more appropriate indices that reflect their investment objectives and strategy. CA ANZ and CPA Australia also submitted:
One of the issues identified in relation to the operation of the performance test is the use of selected benchmarks. In many cases, these benchmarks do not resemble those used by trustees, asset consultants and investment managers in the construction of a product. Also, they are not useful to members in assessing the performance, or the appropriateness, of a product for retirement savings.
Extension to other values-based products
2.9
There was a preference among some submitters and witnesses that the supplementary performance test proposed by the bill be expanded to all values-based superannuation products—of which faith-based products make up a small subset—including products that follow ethical, sustainable, and environmental, social and governance (ESG) investment principles.
2.10
As summarised by Ethical Super Australia:
These products have high conviction investment strategies that are based on specific beliefs on either religion, the environment or social issues, which result in a material restriction of the investable universe that is available to invest in.
2.11
Dr Mark Zirnsak, Senior Social Justice Advocate of the Uniting Church in Australia, Synod of Victoria and Tasmania (Uniting Church), made clear the Uniting Church’s explicit support for Schedule 5 of the bill as it stands. Nevertheless, Dr Zirnsak expressed support for the notion that the supplementary test should be extended beyond just faith-based products to ethical funds generally:
There is a growing sense within our communities of that desire to wish to invest ethically…Having a provision that allows it to make it easier for both religious and ethical funds to exist would be very desirable for people wishing to exercise those concerns out of their faith or just out of their general ethical view of life as well.
2.12
ASFA also argued that the scope of the bill should be broadened to all values-based products, submitting that such products impose limitations on investments in certain assets in the same way as faith-based products.
2.13
Reiterating this view, Dr Fahy from ASFA advised the committee:
…we believe the scope of the adjustment should be extended or broadened to include all values based investing; more specifically, the question of ESG, ethical and sustainable investment. Many products that employ these values based or principles based investing, often born of very legitimate risk management concerns associated with climate change, have applied filters and produce outcomes that are not able to, if you like, reflect the investable universe in terms of their investment returns. Therefore these products, by virtue of imposing limitations on investments in certain assets, act the same way as faith based products through utilising filters and screens that preclude investments in assets that meet certain negative specifications or fail to meet specified positive criteria.
2.14
Similarly, Mr Simon O’Connor, CEO of the Responsible Investment Association Australasia (RIAA), told the committee that, in terms of portfolio selection, the investment approach applied for a faith-based investor is ‘exactly the same’ as that for a secular values-based investor. Mr O’Connor continued that, should the bill proceed, it is worth considering broadening its scope to other ‘specifically defined values-based investing approaches’.
2.15
CA ANZ and CPA Australia agreed that the ability for trustees to apply to the Australian Prudential Regulation Authority (APRA) for the assessment of a product under the supplementary test should be extended. CA ANZ and CPA Australia submitted that the approach proposed by the bill, whereby a product is benchmarked against ‘more appropriate’ indices, could easily be suitable for faith-based and other investment strategies.
2.16
Ethical Super Australia also suggested that the bill be expanded to include values-based and ethical products within its scope. They submitted that this could be achieved by incorporating an overarching definition of what constitutes a ‘values-based’ product:
The Bill could be expanded to include high conviction values-based / ethical products by adopting specific definitional parameters. Utilisation of an overarching 'values-based' product definition that appropriately captures products that have clear investment mandates based on specific beliefs on either religion, the environment or social issues would cover relevant products where the investable universe is materially restricted.
Carve-out of faith-based products
2.17
Consistent with opinions that the assessment of faith-based products ought to be considered more broadly as a subset of values-based products, some commentary during the inquiry described Schedule 5 of the bill as being piecemeal or having been ‘cherry-picked’. However, others portrayed the legislation and its implementation as a worthy ‘test case’ for any future approaches or changes with respect to the Your Future, Your Super (YFYS) regime, including to the performance test and how it operates.
2.18
Mr O’Connor from the RIAA described the treatment of faith-based products under the performance test as a ‘problem that needs addressing’, further remarking:
…we see merit in it being addressed. If that means starting with faith based funds in the way this has been put forward and this legislation has been brought forward, then we see this as certainly deserving attention and deserving addressing.
2.19
Expanding on these comments, Mr O’Connor reflected on the bill as being an opportunity to grapple with solutions for different investment approaches to ensure continued consumer protection and strong investment outcomes for members:
So we do see this as a useful process to understand how we might address that and then think about how that might apply more broadly when we consider the numerous other approaches that might be applied that may make it hard to choose just one generic performance based test applied across them all.
2.20
Echoing this view, Dr Zirnsak told the committee that while the Uniting Church would be supportive of the Schedule 5 being amended to encompass values-based products, it would also not be opposed to the measure being implemented as an ‘incremental approach’, whereby a similar mechanism may be applied more widely in future.
2.21
Mr Luke Spear, Assistant Secretary, Members Outcomes and Governance Branch, Department of the Treasury (Treasury) agreed that the faith-based measures in the bill constitute a ‘solid case study’ from which other potential changes to the performance test could benefit. Mr Spear noted that this is something Treasury is looking at as part of the YFYS review presently being undertaken by the department:
There are lots of different, complicated issues as part of that. It's looking a lot at the performance test and the different options. I basically agree with what you're saying: this process will definitely help us as a case study, as part of further recommendations and advice to government on similar matters.
Your Future, Your Super review
2.22
While not necessarily seeking to delay the passage of the bill, several inquiry stakeholders were of the opinion that matters pertaining to the treatment of values-based products—including those of a faith-based nature—would best be considered holistically as part of the YFYS review.
2.23
For example, Industry Super Australia (ISA) argued that outcomes of the YFYS review pertaining to the performance test could have implications for
values-based products more broadly:
…Treasury is considering the performance testing regime, including whether there are likely to be any implementation issues or unintended consequences as the test is extended to other (non MySuper) products. As such, ISA proposes that the application of the performance regime to faith-based products should be considered as part of this broader review as the outcome of the review may have significant implications for all values-based products, including faith-based products.
2.24
CA ANZ and CPA Australia described the committee’s consideration of the bill as ‘premature’, noting that the YFYS review will examine the operation of the performance test, including the appropriateness of APRA’s approach to benchmarking using specified indices. They recommended that the faith-based measure proposed by Schedule 5 of the bill be deferred until the YFYS review has concluded.
2.25
Mr O’Connor from the RIAA characterised the YFYS review as ‘the appropriate forum to explore and respond to the challenges of the performance test’ for broader values-based products, including faith-based products:
In our view, faith based products should not be separated from the much wider array of products that seek to meet the values and expectations of Australians. All values-based investing products face the same challenges when it comes to the performance test.
2.26
However, in later evidence to the committee, Mr O’Connor clarified that it is not the RIAA’s view that the bill be deferred until the YFYS review process has occurred:
We're assessing this bill on its merits as a bill that's passing through parliament now, so we're providing our comments in light of that bill assuming it's moving through the legislative process. It's not our view to say delay, defer or otherwise with this bill. We're just thinking of the broader implications of this and thinking about how that's considered in light of other equivalent investment strategies that have very similar constraints and approaches.
Treasury’s comments
2.27
Mr Spear from Treasury acknowledged that the department has received feedback through the consultation process on the exposure draft and regulations that faith-based measures should be expanded to include all values-based investment.
2.28
However, Mr Spear cautioned any such expansion, stating that ‘I wouldn’t want to overstate how easy that would actually be in practice’. Mr Spear pointed out that Schedule 5 of the bill was drafted under the expectation that there would be a very limited number of applications—‘less than a handful’—to APRA from faith-based funds.
2.29
Further, Mr Spear indicated that if ESG and other values-based products were to be included in measures pertaining to an alternative performance test, a different mechanism to that presently specified in Schedule 5 would need to be determined.
2.30
Mr Spear also highlighted the risks for people of faith if the bill did not pass, noting that ‘if people of faith are not able to invest via a fund or a product…they may have to look to other alternatives to invest’. He noted that while self-managed super funds (SMSF) could be an option for some people to invest in accordance with their faith, ‘that obviously is not a viable option for a lot of individuals, especially for those who do not have a very large super balance’. He noted that the average super balance in APRA regulated funds is $70,000 or $80,000, whereas ‘you need to have almost $200,000 or $300,000 for a SMSF to be practical’. Further in the SMSF sector, there are fewer regulatory protections for investors.
2.31
From a practical perspective, representatives from APRA commented on what extending the scope of the bill to incorporate all values-based products would mean in terms of implementation. Dr Katrina Ellis, General Manager, Superannuation at APRA noted that such a change would require changes to APRA’s internal processes and systems:
As far as implementation goes, we have systems in place to run the performance test as it is now. We would have to go through some work to have a look to see how we would need to change our systems. We really haven't turned our minds to that because, as my colleague from Treasury was saying, the current bill only contemplates this narrower focus. So there likely would be some changes to our processes and systems that we would need to consider with that expanded scope if it were to be in place…
Performance of faith-based products
2.32
Some submitters and witnesses raised concerns that the supplementary performance test permits the underperformance of faith-based products, or at the very least, creates the impression that such a product has been awarded ‘special treatment’.
2.33
For instance, ISA questioned the rationale behind introducing the supplementary test, stating:
…it is not clear why it is necessary to introduce a differential test which undermines the intention of the performance test regime by permitting a class of superannuation products to underperform compared with the rest of the market.
2.34
ASFA contended that allowing for faith-based products to be assessed under a supplementary test ‘creates the impression that a product has ‘failed’ but has been granted special treatment, in the form of a concession, to be assessed against another test’.
2.35
However, in evidence to the committee at the public hearing, Dr Fahy from ASFA sought to qualify that faith-based products do not necessarily equate to lower investment returns:
I think what we can say is that the reduction [in the investible universe] means that funds, the investment managers, would have to look at other asset classes to achieve returns. That might see greater exposure to other types of listed equities. It might see greater exposure to real estate. But it's not necessarily axiomatic that it would lead to lower returns.
2.36
Similarly, Dr Zirnsak from the Uniting Church emphasised that it isn’t the case that a faith-based product, or indeed any values-based product, will underperform as a general rule. Dr Zirnsak rationalised that, in applying particular ethical or religious filters, values-based investments will perform differently to the overall average when benchmarked against standard market conditions.
2.37
The Uniting Church and U Ethical reiterated this point in their joint submission, giving the example of how energy sector investment filters could impact performance test results over time:
The performance of faith-based superannuation products will fluctuate over time, with some over-performance and some under-performance against a general test benchmark depending on market conditions. For example, certain ethical exclusions (for instance the energy sector over the last 12 months) may impact the performance test results in any given period if there is significant market volatility, but will not necessarily lead to lower performance over the long-term for faith-based superannuation products.
Faith-based product determination
2.38
Some stakeholders raised concerns regarding the proposed mechanism by which APRA may make a determination that a product is faith-based product and is thereby granted the application for assessment under the supplementary performance test. Under subsection 60L(4) of the bill, APRA can make a determination that product is a faith-based product if a trustee provides APRA with a valid application.
2.39
Specifically, subsection 60L(4) to the bill states:
If the trustee or trustees give APRA the application within the period specified in subsection (5), APRA may make a determination in writing specifying the product in relation to the financial year. [emphasis added]
Availability of merits review
2.40
The Explanatory Memorandum (EM) to the bill notes that APRA’s decision whether or not to determine a product is a faith-based product will not be a ‘reviewable decision’ within the meaning of the Superannuation Industry (Supervision) Act 1993. The EM further notes that such a decision constitutes an ‘automatic decision’ and is therefore unsuitable for merits review in accordance with the Administrative Review Council’s guidelines.
2.41
As outlined in Chapter 1, in its Scrutiny Digest 5 of 2022, the Senate Standing Committee for the Scrutiny of Bills (Scrutiny Committee) also questioned the explanation given in the EM that a decision to determine that a product is a faith-based product is an automatic decision, given that proposed subsection 60L(4) states that ‘APRA may make a determination’. The Scrutiny Committee further noted that ‘there is nothing on the face of the bill mandating that a subsection 60L(4) determination must be made upon receipt of a valid application’.
2.42
Representatives from Treasury sought to clarify that the bill’s wording pertaining to subsection 60L(4) and APRA’s ability to make a faith-based product determination is intentional. Mr Spear from Treasury reasoned:
…the reason the legislation has the word 'may' rather than 'must' is that we wanted to give APRA the ability to effectively reject applications in which they consider there to be a misrepresentation. With the alternative wording—if you include 'must', as in 'APRA must make a determination'—if the fund applies and ticks all the boxes above, there's no ability to prevent funds applying that are, for example, not based on faith based principles but make a declaration that they are. That's the real reason for that wording.
2.43
The Scrutiny Committee requested the Minister's advice as to whether the bill can be amended to provide that independent merits review will be available in relation to a decision made under proposed subsection 60L(4). In the Minister’s response to the Scrutiny Committee’s request, it is noted that subsection 60L(4) to the bill has been drafted permissively, as APRA may not make a determination where it reasonably believes declarations made by a trustee in its application are false. The response also states:
This discretion is very limited, allowing APRA to consider the truth of the declaration and supporting evidence. For example, APRA may through its compliance action, become aware that the trustee has provided false or misleading information. As such, the decision is not appropriate for merits review.
Definition of faith-based product
2.44
Dr Donald contended that the legislation requires an objective definition of what constitutes a ‘faith-based product’:
…a cornerstone of APRA’s process will have to be the discriminant on which the regime depends: whether the approach described is faith-based or not. In practice, then, APRA will require a definition of ‘faith-based’ in order to give effect to the regime.
2.45
Other submitters and witnesses also called for greater clarity around the definition of a ‘faith-based product’. For example, CA ANZ and CPA Australia submitted:
We note that although these [application requirements] are supported by regulations which can be made under subsection 60L(3), there is no objective definition of ‘faith-based product’, apart from a circular reference to subsection 60L(4) which specifies that this is, essentially, whatever APRA determines the product to be.
We do not believe that this is helpful to either APRA or trustees in making or considering applications for consideration as a faith-based product.
2.46
The committee heard a similar view from Mr O’Connor of the RIAA, who suggested that more detail relating to the definition of faith-based products could be incorporated into the regulations accompanying the legislation:
…we would reiterate that we think there is more detail that would be very helpful around this bill that could come into the regs themselves, in terms of being very clear on the definitional elements of faith based products. All this could become quite messy if we don't clarify that really tightly.
Religious misrepresentation
2.47
Another issue raised by stakeholders in relation to the proposed mechanism for faith-based determinations—and in turn the suggested definitional challenges—is the potential for trustees to effectively ‘make up’ a new religion in order to be granted an application for assessment under the supplementary performance test.
2.48
Dr Donald conveyed the view that, in its current form, the bill allows for a situation in which a trustee could make an application based on a system of beliefs not otherwise recognised as a faith. Dr Donald cautioned that:
So, whilst that [meaning of faith-based] would be obvious for many mainstream religions, someone could make up an application based on something that none of us has ever heard of as a faith, and there's no obvious way in which APRA could deal with that. So my suggestion is that, what purports to be a mechanical process that would not be subject to judicial review because it would not be a reviewable decision in practice, there will have to be a discretion there. And just as there will have to be a discretion for the ones where you look at them sideways and think, 'Hmm, I'm not sure that that's a faith,' that has to apply to everybody. So, essentially, the mechanism of trying to reduce this to a mechanical decision, which is what the bill is all about, just simply won't work.
2.49
Mr Spear from Treasury advised the committee that the possibility of misrepresentations regarding faith was something that the department had considered in the development of the policy associated with the faith-based measures. Broadly speaking, in designing the bill, Treasury was mindful that only a very limited number of trustees would put forward an application to be assessed as a faith-based product. Moreover, such a circumstance was considered to be a very low integrity risk for the bill. Firstly, this is because the risk of an individual creating a whole new religion and, in turn, setting up a superannuation fund on a commercial scale is small. Secondly, this would be considered to be a misrepresentation, and APRA would therefore not be obligated to provide a determination in favour of the applicant.
Avoiding fatalistic outcomes
2.50
The generic nature of benchmarks used to assess a superannuation product’s performance can result in a mismatch—or ‘tracking error’—between that product’s underlying investment profile and the performance test. A number of witnesses drew the committee’s attention to the significant and unintended risk associated with this tracking error for faith-based products, and in turn stressed the need for an appropriate mechanism to mitigate this risk.
2.51
Indeed, Dr Fahy from ASFA remarked that the tracking error created by the performance test as it currently operates gives rise to what are essentially ‘fatalistic consequences’ for affected funds. Dr Fahy told the committee:
…it's important that we have the mechanisms that we use to assess that performance as a reflection of the underlying assets that the product is invested in, and that any tracking error which gives rise to what are essentially fatalistic consequences for the fund in question need to be removed as far as possible. The reality is that it would be impossible for a faith based fund to actually hug and meet the benchmark, because it's screening out the investable universe.
2.52
In support of the supplementary test mechanism proposed by the bill, Ethical Super Australia similarly submitted:
Combined with the consequence of underperforming the performance test, such as being closed to new members, this related cohort of products face unintended existential risk. The performance test architecture proposed within the bill offers a practical way to mitigate this unintended risk for faith-based products.
2.53
Mr O’Connor from the RIAA noted the real consequences some funds have faced as a result of failing the performance test in the first year since its introduction, pointing to the recent merging of some faith-based funds and movement towards some funds no longer existing. Further, Mr O’Connor stressed the importance of issues pertaining to the treatment of faith-based products, and preferably values-based products more widely, being addressed in a timely manner:
There is a real need for those remaining to have some resolution around this, because there's a very real impact of the way the current test is structured. It's having an impact, such as its impact on one of the funds I named earlier…There's a need to respond to this issue. I think equally the urgency of that need is for other values [based] funds as well. We believe that with the choice of funds and the options for citizens out there with different values, different preferences and different faiths it is really integral that the super system provides that for them.
Schedule 4—Tax treatment for new or revised visa programs
2.54
The committee received one joint submission on Schedule 4 to the bill from the Uniting Church in Australia, Synod of Victoria and Tasmania; Pacific Islands Council of Queensland Inc; Pacific Islands Council of South Australia; and NSW Council for Pacific Communities (the organisations).
2.55
The organisations submitted that the differential rate of tax proposed by Schedule 4 will act as a disincentive for workers to disengage from the Pacific Australia Labour Mobility (PALM) scheme and work illegally in breach of their visas. The organisations explained that this is beneficial because disengagement from the PALM scheme means that the worker is left without the protections and support of the scheme.
2.56
The organisations also noted their support for Schedule 4 in that it will allow the reduced withholding tax rate to be extended to income earned by foreign resident workers under any programs prescribed by regulations. They note that this flexibility:
…will assist in avoiding future delays in reforms to such visa schemes as has occurred in the current case and save the Parliament having to pass an amendment due to a change in the name of a scheme or visa.
Committee view
2.57
Communities of faith have for a long time expressed concern at the barriers faced when it comes to aligning their investment choices with their faith-based principles. The government has listened and has worked with faith leaders around Australia to fulfil its election commitment and take prompt action to address this concern. As the superannuation system is something that most Australians are required to participate in, people of faith should have the option of investing their retirement savings in products that align with their values.
2.58
The superannuation performance test introduced through the Your Future, Your Super reforms plays an important and necessary role in ensuring superannuation funds are delivering appropriate outcomes for their members. However, the committee acknowledges that faith-based products are potentially disadvantaged, albeit unintentionally, by the current operation of the performance test, and that this should be addressed.
2.59
Most submitters and witnesses to this inquiry agreed with the intention behind the measure proposed by Schedule 5 of the bill, and in fact, considered that the measure should be extended to cover values-based superannuation products more broadly. However, the committee is mindful that, while values-based products may impose limitations on investments in a similar way to
faith-based products, the extension of the supplementary test to such products would not necessarily be as simple as portrayed.
2.60
As outlined by Treasury officials, the supplementary test was designed with the expectation of being applied to only a very limited number of products. Further, any mechanism for values-based products, such as products purportedly following environmental investment strategies, would need to consider risks posed by practices such as greenwashing.
2.61
The committee notes the Your Future, Your Super review currently being undertaken by Treasury, may consider the operation of this Bill to better understand and inform any similar matters that may arise. However, the existence of the review should not preclude or delay the passage of the Bill which aims to address clear and specific issues related to the operation of faith- based funds.
2.62
The committee is concerned that the current performance test has had real impacts for faith-based funds and, moreover, risks further unintended impacts on the faith-based segment of the industry should issues not be addressed in a timely manner. In the committee’s view, Schedule 5 of the bill gives communities of faith certainty that they are able to invest in a manner aligned with their religious beliefs, without compromising on performance standards.
2.63
The committee appreciates concerns raised by stakeholders regarding the potential for misrepresentations of faith to arise through applications to APRA for a faith-based determination. However, the committee is of the view that these concerns are overstated and should not be considered an impediment to passing the bill, as the risk of such an occurrence is exceedingly low in practice.
2.64
The amendments in Schedule 4 to the bill ensure that workers participating in the PALM scheme pay tax at an appropriate concessional rate, consistent with similar migration programs. The committee is confident that the measures in Schedule 4 will help ensure the success of the PALM scheme and increase Australia’s attractiveness as a destination for foreign resident workers.
2.65
The committee notes that it did not receive any feedback regarding the foreign investment and taxation amendments proposed by Schedules 1 to 3 of the bill or its related bills during the inquiry.
2.66
The committee recommends that the bills be passed.