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  • ATO superannuation regulatory framework – engagement, visibility and assurance

    Presentation to Association of Superannuation Funds of Australia (ASFA) 2018 National Conference, Adelaide

    Session 4B: National Risk and Compliance Discussion Group

    Adelaide Convention Centre, 15 November 2018

    Panel member James O’Halloran, Deputy Commissioner, Superannuation, ATO

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    Introduction

    As part of this National Risk and Compliance Discussion Group session it’s a pleasure to be here today and to participate in the 2018 ASFA Conference with my fellow industry co regulators.

    The ATO has shared the journey of superannuation reform with you these past few years and we’ve seen many changes across the policy, legislative and administrative landscape, as well as shifting expectations by the community and fund members. During this journey we have, perhaps like many of you, increasingly placed different expectations on ourselves.

    Of course, at the same time, we’ve remained focused on the final phase of the SuperStream program aimed at electronic fund-to-ATO rollovers involving changes to unclaimed monies standards and processes.

    For some time now we’ve also been working in tandem with industry to ensure that in this changing environment, we don’t miss any opportunities to leverage from the investment we’ve all made in SuperStream.

    An example of this is the government’s April announcement to expand SuperStream to include self-managed super fund (SMSF) rollovers from 30 November 2019. For APRA funds this requires building on current SuperStream messaging. In partnership with both APRA funds and SMSF representatives, the design is taking shape.

    I believe our collaboration has contributed to achieving the common goal of funds, advisers and the ATO, which is to make the operation of the super system increasingly visible, giving members an almost ‘real-time’ view of their super. This will allow for enhanced engagement, better support and advice and therefore better outcomes; promoting trust and confidence in the super system.

    To this end, since last year’s conference we’ve worked with you to design – and well and truly operationalise – the major budgetary reforms. At the same time, we’ve sought to better use technology and continue to ‘design in’ even more visibility to increase member and community confidence.

    ATO context

    The ATO’s interactions across the super system encompass different roles, responsibilities and expectations. Expectations vary – from providing reliable digital information services and facilitating innovative administrative arrangements, to regulating and advising in ways which ensure certainty and fairness in how we administer tax and super laws.

    More recently however, through policy and so called ‘machinery-of-government changes’, the ATO as an agency is relied upon even more as a key service provider, an enabler and a regulator across the super system.

    Effectively, since 1 July 2018, these expanding touchpoints include:

    • administrative responsibility for the early release of superannuation benefits on compassionate grounds
    • broadened commitment to small business through the Small Business Superannuation Clearing House
    • administrative responsibility to ensure the lawful release of super to support first home buyers and administration of the downsizer home measure
    • a changing enforcement landscape to assist the ATO to monitor the payment of super guarantee (SG) contributions
    • progressive introduction of Single Touch Payroll with its key connection to super contributions.

    Of note, during the period 1 July 2018 to 31 October 2018 we received 14,600 compassionate early release applications with $127m being approved for release; 1,528 individuals requested a release of first home saver amounts totalling $20m; and we were notified by funds of 79 downsizing contributions from fund members totalling $19.5m.

    For some time now, no doubt like many of you, we’ve focused intently on improving our client experience and the services and assurances we provide. We want to make it easier for clients to deal with us and to facilitate better access to information and advice about their super.

    Regulatory reporting based on an annual cycle is no longer fit for purpose. Like other annual reporting arrangements there are inherent errors, lags and inability to prevent errors in a timely manner. A progressive or ongoing reporting framework will help funds and members deal in advance with new events and decisions. We’ve worked intensely with many industry and fund specialists as well as representatives of both ASFA and ASP Services to make the transition to ‘event-based’ reporting and move from a concept to reality.

    Pleasingly, this transformational change has now begun and the move from the constraints of annual reporting is well underway. I can state with some confidence that event-based reporting will be complete by April 2019. By then we will be fully operational, with specified events reported to the ATO within either five or ten business days of the event, be it a change to a fund member’s account or certain types of transactions. For this reason the last annual Member Contribution Statement report for 2017–18 was due on 31 October 2018.

    Progressively, we’ll make this information available to individuals and their tax agents, likely from March 2019. In particular the added value will be a complete picture across a member’s entire APRA super portfolio.

    With progress made to date, we’re moving to truly be able to gain greater insights as a result of this more timely data. We can then use this information to seek to prevent breaches, identify correct SG payment and support statutory reporting obligations and general governance into the future.

    Member engagement with their super

    We all want strong member engagement; it’s an important and an ongoing challenge which must remain a focus. I would therefore now like to talk about how we work, and will work, with you and your members to achieve this goal.

    We want a community that willingly participates, or engages, in the tax and super system – because it benefits all Australians and indeed Australia. In a superannuation context, engagement will ensure members take an interest and play an active part in decisions to protect their future retirement and financial wellbeing.

    Over many years, working with and across industry, our maturing engagement and reuniting strategies have significantly improved how people better connect with their super, make decisions and receive their super entitlements into their accounts. However, there are some important foundational areas where I think we all see potential to enhance member outcomes.

    Firstly, we must keep people connected with their super so they are able to make informed choices on the best fund for their circumstances and secondly, reduce unnecessary duplicate super accounts.

    Specifically, we’ve improved the client experience for temporary residents and their super funds by making changes to the Departing Australia Superannuation Payment (DASP) online application system. These changes allow clients to self-service and access third-party visa information from the Department of Home Affairs via their application as part of the working holiday maker measure.

    At the same time, through our ATO online portal for individuals we’ve enabled people to check their super accounts, initiate consolidation and rollovers and receive timely reminders about their tax. While the portal has been limited by the lag in some information, it’s been an increasing success by any measure in giving individuals information about their super.

    In this past financial year alone, there were over 4.7 million searches for super via the ATO portal, compared with 2.9 million searches the previous year, illustrating greater client engagement.

    Reducing the number of multiple accounts held by fund members is in all our interests and it’s good to see the incidence of unintended multiple accounts reducing. Individuals can create multiple accounts if they default (upon new employment) or open a new account and don’t roll over their existing account. While this may be an intended outcome by those who are engaged with their super, more often than not, creating multiple accounts is accidental.

    As at 30 June 2018, over 15.6 million people had a super fund account with about 39% of these people having more than one account.

    We estimate the proportion of individuals holding only one super account increased from 55% in 2013 to 61% in 2017. Similarly, the percentage of individuals with three or more accounts is also gradually reducing: from 19% in 2014 to 14% in 2017. Notwithstanding these positive results, we still have over 160,000 individuals with six or more accounts.

    In support of the proposition that people need good information to support a change in behaviour, in the 2017-18 financial year through ATO online services (via myGov), some 532,000 accounts were consolidated by individuals, to the value of $3.18b. Further, over the past five financial years (1 July 2013 to 30 June 2018) about 2.21 million accounts to the value of $11.3b have been consolidated or transferred by individuals, using our online services.

    Just last month, we launched a media campaign on the levels of annual lost and unclaimed super, aimed at encouraging people to maximise returns by claiming super they may have become disconnected with over time. The campaign specified the top five postcodes in each state or territory with the biggest variance in lost and unclaimed super.

    In its first week, the campaign generated high levels of media and social media coverage (34 items nationally in print, radio, TV and professional newsletters) and as a result ATO online services recorded a 54% increase in visitation in October, with just over 593,000 individuals checking their super. In turn, individuals used our online services in October to consolidate over 47,000 accounts with a total value of $357m. This represents a 64% increase in the value consolidated compared with the previous month, or $140m in dollar terms. The average account balance consolidated was $7,557.00

    We believe it’s important to reach all sections of the community and in the past two years have taken an active role in face-to-face initiatives with Indigenous Australians. In May 2018, we supported the ASIC Indigenous Outreach program in a visit to the remote community of the APY (Anangu Pitjantjatjara Yankunytjatjara) Lands in South Australia with the Department of Human Services, Austrac, MoneyMob, First Nations Foundation and various APRA funds,

    Over five days, the ATO assisted over 500 people to better understand the super system as well as assisting them to find lost super and consolidate multiple accounts. We have provided similar support at other Indigenous events and in other remote Indigenous communities during the year. Feedback from community members has been that many were not aware they had several super accounts. This is proving a common theme and is a challenge we must work to overcome.

    On 8 May 2018, as part of the 2018-19 Federal Budget, the government announced the ‘Protecting Your Super Package’. The package proposes ways to recognise the issue of small and perhaps unnecessary super accounts and how they could be consolidated. With a proposed start date of 1 July 2019, it consists of measures designed to protect super accounts with low balances. It will require super providers (excluding SMSFs, small APRA funds and defined-benefit funds) to pay a member’s super account to the Commissioner if the account has been inactive for 13 months.

    Visibility of super

    I’ve often observed it’s in all our interests that super information is accessible so its value is more recognised and that individuals feel a sense of real ownership of what is, after all, their money – in short, that super is ‘visible, valued and owned’. We all play a part in making this aspiration a reality.

    Since April 2018, we’ve been progressively releasing two new digital services to make decisions made by members visible. The move from fund reporting based on the annual Member Contribution Statement has begun and our oversight of the super system will be gradually enhanced towards June 2019.

    The new ATO Member Account Attribute Service (MAAS) and Member Account Transaction Service (MATS) will allow individuals to access:

    • up-to-date information and therefore gain a better understanding of their super position at any given time
    • see account information for all their funds, on myGov
    • have timely visibility of SG paid by their employer (complemented by STP data).

    All APRA funds were required to have implemented the Member Account Attribute Service by 31 October 2018 and to have provided their foundation data for all member accounts to the ATO. Pleasingly, with a few ATO-agreed deferrals, we’ve received the data for almost 99% of all APRA fund members (ie 31.6 million of 32.2 million fund accounts).

    Funds now have to routinely report to us, within five business days of the event, information on:

    • opened accounts (including all attribute information)
    • any attribute and phase changes (including lost statuses)
    • closed accounts.

    Over 10 million transaction updates have now been made to member accounts. Whereas previously we would only have seen member account changes annually, we now have almost real-time visibility. And we’re starting to hear positive feedback about the value and benefits to funds and members of this change. As an example, one small fund (with about 30,000 members) advised that as a result of the move to event-based reporting, their lost member count has dropped by 66%.

    We do want to build our future strategies on an approach grounded in shared visibility and a desire to warn about and thus prevent regulatory breaches. We want to deal with issues as they arise, not at the close of an annual reporting cycle; in other words, we want to move from a focus on data collection to one of developing insights from data. This will assist us all to shift from a detection focus to evidence-based prevention.

    This near real-time visibility of information will enable the ATO to raise concerns earlier and allow people to better connect with their super and in turn help mitigate ongoing regulatory breaches and prevent the growth of excess tax payments.

    With the recent changes to the concessionary settings and cap and transfer restrictions, these issues are more important than ever for members, funds and the ATO.

    As 31 October has passed, our focus and engagement is now very much on onboarding support and orchestrating the second ATO event-based service, the ATO Member Account Transaction Service. Following onboarding and before the MATS compliance date of 1 April 2019, funds need to report all transactions processed between 1 July 2018 and their implementation date.

    MATS requires funds to report to the ATO within 10 business days:

    • receipt of super contributions from employer; non-employer; or reporting events as derived from the Transfer Balance Account Report (TBAR)
    • 30 June balances
    • the notice of intent to the ATO (where an individual has advised their fund they intend to claim a deduction in their tax return for any personal contribution).

    As at last week, we’ve received over 2.2 million member transactions reports (4.3% coverage) from funds.

    As well as improving the experience for individuals and funds, the ATO will also benefit, including by seeing payments to funds in near real-time and being able to reconcile an employer’s super liability from data received via STP against actual super the employer has paid to the fund.

    As at 4 November, over 48,000 employers have implemented STP, including nearly 18,000 small employers. As a result over 3.3 million employees can now view their payroll information on myGov.

    More broadly, individuals and funds will have data available to alert them when nearing their super caps. Data will also be available to prompt employers before compliance action is required, enabling them to take timely action. The ATO will also be able to provide more tailored and proactive assistance through prompts and nudges, such as letting an individual know they’re nearing a cap. We’re currently working to find ways to display, ideally through myGov, the amount of SG deposited into an employee’s account. We’ve been discussing with funds the best way to implement this.

    Last year at this conference I spoke about the ATO's APRA Fund Diagnostic Report. A key part of our current endeavour is perhaps manifested through this report for funds. It’s now in its fourth year and needs to be revisited in light of recent super reforms.

    We‘ve received positive feedback on the current format as being very useful for trustees and administrators. While we want to continue to share comparative and relative performance data with APRA funds, as we move to event-based reporting and other changes, we also want to ensure the report provides even greater value to you.

    In refreshing our diagnostic reports, we will increasingly seek to identify data sources that will help us identify trends in account or member inaccuracies, breaches of the Superannuation Industry (Supervision) Act 1993 (SIS Act) and issues from related tax and super legislation.

    Having done some internal planning, we’ll meet in the near future with a small sample of funds and industry groups to test our proposed approach to a new fund diagnostic report. From there, we will consult more broadly once we have a draft design in place to get a sense of what new data sources may be useful to identify.

    In any event, we intend to continue providing large APRA funds with a relevant and increasingly contemporary report that will provide comparative performance against other funds using elements of benchmarks. A high priority for us this year is to support funds going through a successor fund transfer (SFT) or change in administrator. We’ve observed an increase in SFT activity, as funds with smaller memberships seek to merge with larger ones, often becoming a subplan within the successor fund. So far, we’ve assisted with nine SFTs in 2018-19, compared with 15 SFTs and changes in administrator in 2017-18.

    SFTs and administrator changes present a significant risk to the integrity of super fund data. Having measures in place to verify the quality of the transferred data limits the potential impacts on members, and ensures member attributes are correctly displayed on our online services.

    We’ve published a successor fund transfer reporting chapter as part of the Fund Reporting Protocol and it provides guidance on SFT reporting obligations. Funds considering a SFT must understand the consequences for members and the impact on reporting. This includes:

    • funds discussing and agreeing when they expect the closing and subsequent opening of member accounts to occur
    • identifying any blackout periods where no reporting will occur
    • funds agreeing to the dates each fund will be responsible for re-reporting, regardless of which fund made the error or omission
    • funds communicating to members and the ATO where they will be unable to respond to notices of intent and release authorities.

    Our Client Relationship Team will continue to support funds undergoing an SFT and data migration.

    While on the topic of corporate assurance, from an income tax perspective, we’re seeking to continue work collaboratively with funds.

    As part of the ATO Public Groups & International (PGI) Top 1000 review program, we’re designing our data assurance and engagement approaches to implement our Investment Industry Strategy which includes large APRA-regulated super funds.

    For this reason, in recent months we’ve been engaging with various client groups, their advisers and service providers as we continue to develop this strategy. We plan to start tailored engagement with clients in early 2019 and will work collaboratively with over 80 funds within the Top 1000 population to achieve higher levels of assurance by June 2020. We’ll share more information with you in the coming months

    Assurance of super contributions

    Non-payment of SG is a significant focus for us and a major part of our compliance activities. This isn’t a recent focus or just because of recent community interest. We have a more than credible track record on this issue but remain keen to improve and to do more.

    As the Chair of the 2017 Superannuation Cross-Agency Working Group which provided a report to the government, I’d like to share a few reflections. In that report we identified a number of matters for government to consider across policy and legislative settings and acknowledged some administrative and process improvements the ATO and other regulators could make in order to work together more efficiently and effectively.

    I think the report and the ongoing community discussions have highlighted the importance of finding ways to increase the visibility of the actions of employers and employees in the super system, a system in which funds are at the centre. For this reason, it’s pleasing to see the strong community discussion about minimising underpayment or non-payment of SG by employers.

    In the past nine years, the ATO has distributed almost $3b in recovered super contributions to over 1.8 million employees. In the past five years, we’ve checked the records of over 100,000 employers and in the past financial year alone, we’ve completed some 32,000 reported instances from which we initially contacted over 24,000 employers to determine if there has been any non-payment of SG.

    Last year we also completed 19,000 detailed cases where we identified evidence of a potential underpayment or non-payment and this was established in seven out of 10 cases. The average assessment was for approximately $50,000.

    From these 19,000 cases, we raised assessments for $850m from our compliance activities which was due to be paid to some 238,000 employees (this comprised 13,038 ATO-initiated cases, including reminder and disengaged reviews, raising $179m and 18,916 employee notification cases raising $671m).

    Pleasingly, we were able to pay over $400m into employees’ super funds with many of these employees not even aware that they hadn’t been paid their SG. Of course we do acknowledge there is a level of non-payment and have recently refreshed our SG gap estimate for the 2015-16 year as part of the ATO 2018 Annual Report (released on 31 October 2018). The revised gap for 2015-16 was estimated to be $2.79b which represents 4.8% of the theoretical SG liability. From 2011-12 to 2015-16 the SG gap has been trending down from a high of 6.5% ($3.09b) to 4.8% ($2.79b).

    While noting there are other views about the best way to calculate the size of the gap, I think we’d all agree the main objective for us all is to find ways to deal with any level of SG non-payment. There is of course no one reason for this gap.

    Community and industry referrals to the ATO have been perhaps relatively low so it’s hard to estimate what the correct level should be. We do receive notifications of non-payment from a number of sources and data sets. In the past financial year we received 2,140 notifications from other than (ex) employees. This included some 360 referrals from the Office of the Fair Work Ombudsman; 40 referrals from super funds and some 1,702 referrals from members of the public.

    There is therefore a role for industry to take any opportunities to educate and communicate the importance to employers of paying superannuation guarantee to their employees. It is reasonable to encourage funds to bring forward to the ATO any data or specific reports of employers who may not be paying their employees the required superannuation guarantee.

    So I want to take this opportunity to reiterate that we’re more than willing to receive any voluntary information or data to see how it can complement or assist our data analysis and case work.

    Drawing on your own expertise and knowledge, you’re all obviously best positioned to know your processes, data sets and sources of information. We therefore encourage funds and others to refer potential employers to us where they have reason to believe they’re not meeting their SG obligations. We remain open and willing to work with you to reduce levels of suspected non-payment.

    At a time of significant increase in the number of ATO-initiated review and audit cases in the past financial year, we’ve reinvigorated our efforts to build the best sources of contemporary information to identify non-payment.

    Indeed, as part of this effort, in the past six months we’ve been active with some funds including through the use of our statutory information-gathering powers to gather broader data sets to assist in identifying non-compliant employers. This will continue as we further scope and validate these data sources.

    Looking to 2019 – legislative proposals

    There are a number of government super announcements and possible legislative changes being considered or due to go before parliament that will impact the super industry. As these are not yet law, I will summarise them for you so you can get a sense of the possible changes ahead. Should they be enacted, we will of course proceed to administer the law as appropriate.

    The government has recently advised (Assistant Treasurer, media release, 31 October 2018) their intent to make technical amendments to address minor but important issues:

    • correcting an error in the way market-linked pensions are valued under the transfer balance cap (TBC) when they are commuted or rolled over, resulting in a nil debit
    • to maintain the capped defined-benefit treatment of market-linked pensions under the TBC where they have been rolled over as a result of a successor fund transfer
    • to ensure that death benefits that include life insurance proceeds are not subject to tax when they are rolled over to a new super fund
    • the definition of the life-expectancy period for innovative income streams will be amended to account properly for the number of days in a leap year
    • to provide TBC credits and debits for innovative income-stream products that are paid off in instalments
    • the valuation of defined-benefit pensions under the TBC will be amended to reflect when pensions are permanently reduced following an initial higher payment, such as for some public sector defined-benefit reversionary pensions or reclassification of invalidity pensions.

    A number of super bills were scheduled for debate in the Senate this week:

    Treasury Laws Amendment (2018 Measures No. 4) Bill 2018          

    This bill would implement several recommendations contained in the Superannuation Guarantee Cross-Agency Working Group’s report to strengthen compliance with tax and SG obligations. The package contains amendments to:

    • allow the Commissioner, in cases where employers fail to comply with their SG obligations, to issue directions to pay unpaid SG and undertake SG education courses
    • allow the Commissioner to disclose more information about SG non-compliance to affected employees
    • extend Single Touch Payroll reporting to all employers
    • facilitate more regular reporting by super funds
    • improve the operation of the Commissioner’s collection and compliance measures
    • streamline employee commencement processes.

    A number of minor technical amendments included in the bill include changes to:

    • ensure a reversionary transition-to-retirement income stream will always be allowed to automatically transfer to eligible dependants on the death of the primary recipient
    • remove unintended double-taxation for deferred-annuity income products in retirement
    • clarify that item 2 of Schedule 1 of the MySuper Act began on 1 January 2013
    • expand the definition of ineligible annuity under 159GP(1) of the ITAA 1936.

    Treasury Laws Amendment (Protecting Your Superannuation Package) Bill 2018

    This bill contains amendments to protect people’s retirement savings from erosion, ultimately increasing Australians’ super balances, by:

    • capping fees for low-balance accounts to 3%
    • making insurance opt-in for members under 25, members with low balances (<$6,000), and inactive members (no contribution for 13 months)
    • payment of small, inactive accounts to the ATO after 13 months (down from five years)
    • proactive reuniting of ATO-held unclaimed super where the resulting balance is at least $6,000.

    Treasury Laws Amendment (2018 Superannuation Measures No. 1) Bill 2018

    This bill contains the following changes:

    • SG amnesty – a one-off 12-month offer to catch up without penalty
    • SG opt-out for individuals with multiple employers (preventing inadvertent concessional cap breaches)
    • non-arm’s-length income (NALI) definitions to include non-arm’s-length expenditure
    • limited recourse borrowing arrangement unpaid amounts to be included in a member’s total super balance.

    Treasury Laws Amendment (Improving Accountability and Member Outcomes in Superannuation Measures No. 1) Bill 2017

    This bill covers:

    • annual certification that directors are acting in the best interests of members
    • APRA directions powers
    • annual meeting with member requirement.

    Superannuation Laws Amendment (Strengthening Trustee Arrangements) Bill 2017

    This bill:

    • amends the SIS Act to require trustees of registrable super entities (RSEs) with a board of trustees to have a minimum of one-third independent directors including an independent Chair

    Treasury Laws Amendment (Improving Accountability and Member Outcomes in Superannuation Measures No. 2) Bill 2017

    This bill covers:

    • extending choice of fund to all employees
    • ensuring employers cannot reduce the minimum SG contributions they are required to pay by amounts that employees have salary sacrificed.

    Conclusion

    I want to thank the superannuation industry for working with the ATO during this past year. With the active support of individual super funds, ASFA and ASP Services we’ve made great progress.

    As I have outlined, our common goal is to improve the level of engagement with members and their super to ensure fund members are able to make informed decisions that suit their circumstances.

    We have worked to improve the visibility of the super system as it operates so people can feel able to connect to their super.

    I believe we’ve worked well together and I look forward to working with you as we continue to improve member outcomes and ultimately improve Australians engagement with their super.

    Thank you.

      Last modified: 16 Nov 2018QC 57382