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  • Assurance and governance for large superannuation funds – ATO perspective

    James O’Halloran, Deputy Commissioner, Superannuation (Melbourne 28 May 2018)

    Graham Whyte, Assistant Commissioner, Superannuation (Sydney 4 June 2018)

    Presentation for KPMG quarterly superannuation update sessions

    Check against delivery

    Thank you for the invitation to speak at today’s session. This is the third year we’ve attended and we appreciate the opportunity to share our view of what’s happening across the superannuation sector.

    Over these past three years there has been considerable policy change coupled with ongoing conversation about the super industry and its role in people’s retirement. It’s worth reminding ourselves that super is about people, about fund members and their future.

    A range of lifecycle and generational issues influence people’s attitude to super; these change over time and with each generation. It’s important to understand this context as we pursue our common goal of engaging with the community and fund members to enhance their super experience.

    At the ATO we recognise that we share with you the obligation to provide services, certainty and visibility of data and information to help fund members make informed choices about their investments and retirement plans.

    With the ATO’s increased range of responsibility, and through the statutory duties of the Commissioner across super, we seek to work in harmony with APRA funds and their advisers so the community can be confident the super industry operates with integrity and can be trusted.

    Last year I spoke about ATO's APRA Fund Diagnostic Report (‘the report’). Each year large super funds receive a tailored diagnostic report assessing their performance in meeting their reporting obligations to the ATO and comparing them with other funds. This year we assessed 237 APRA funds that collectively have 27 million members and $1.7 trillion under management.

    In 2017, 99 per cent of funds met their reporting obligations to a good or high standard, with a trend of continuous improvement over the past four years. However, some funds have fallen back relatively and very few funds have met more than eight of the 13 benchmarks. Fifty-two per cent of funds have either maintained or improved their results and improved TFN reporting; but improvements are still needed in lost accounts, lost members over 65 years and open and closed member contribution statement accounts.

    In any event a generally positive outcome translates to a positive member experience but the continued lack of achieving benchmarks does suggest poor member record keeping and outcomes.

    A comparison of the results over 2014-17 does show a steady positive shift of large funds moving from high and medium-risk categories into lower-risk and key-client categories, indicating an increased willingness to voluntarily disclose reporting errors.

    When the Diagnostic Report program was introduced, it represented a significant shift in our compliance approach which had predominantly involved audits as our main assurance methodology. Indeed, in 2008-09 the ATO conducted 120 of what were then called accuracy and completeness audits involving APRA funds.

    Through the ATO Diagnostic Report, we have consciously moved from an audit and review based compliance or detection model to a self-correction and monitoring model. By making data on fund performance visible and available to funds, funds have self-corrected and improved their performance.

    While the report isn’t intended as a ‘league ladder’, it does have a competitive element and, pleasingly, funds have been early adopters in support of the changed approach. The assessment in the report is an important part of our assurance about whether funds have appropriate governance in place around their reporting obligations because if inaccurate or not timely, these will increasingly impact members and general assurance.

    Finally, the report is not about ‘reporting on the reporters’. We, of all regulators, appreciate reporting and legacy systems take time to update, upgrade and align. As we move to more to event-based reporting, fund members will expect us all to have systems which support accuracy and currency.

    From our perspective, the report is about encouraging good data governance, justified assurance and a focus on ongoing improvements. Good data governance in super is about having the systems and policies in place so that data is accurate, complete, consistent, timely, available, and in the required standard. This approach seeks to identify in advance, and therefore prevent, potential breaches of the Superannuation Industry (Supervision) Act 1993 (SIS Act) and related tax and super legislation for trustees and members.

    Assurance and compliance for 2018-19

    So, given this year’s diagnostic results, we’re confident there is strong, quantitative evidence that super funds are meeting their member reporting obligations to a generally high standard. When we consider our journey of the past four years, this gives us a strong basis to assume a level of ‘justified confidence or ‘assurance’ with APRA funds’ performance from a regulatory reporting perspective.

    We don’t, therefore, see the need for audits or a large program of compliance reviews. We do however plan to undertake a small number of information system risk assessments and specific issue reviews with funds that haven’t met benchmarks over several years or may have systemic issues across multiple reporting obligations.

    Of course a key part of confidence in the super system is payment of super guarantee (SG). We are pleased, and indeed appreciate, funds’ assistance in highlighting the visibility of SG payment into members’ accounts through reporting to the ATO when an SG payment is received into a member’s fund (SGF payment). This will greatly help us ensure greater trust and confidence in the SG system. We’ve also ramped up our assurance and compliance activity significantly since we met last financial year.

    In the period to 31 March, we completed 24,226 compliance cases compared with 13,437 cases for the same period last year – an increase of 80 per cent. We’ve contacted over 20,000 employers as a result of reviews or audits, compared with about 16,000 employers for the whole of 2016-17. We’ve raised $644.4M in SG charge (SGC) assessments including penalties and interest from all of our compliance activities and we collected $311M and distributed $297M to employees. Finally, we’ve issued over 2,800 unique SGC director penalty notices with a combined value of nearly $275M in relation to about 2,700 companies.

    Recent government announcements regarding additional funding for an SG taskforce and the announcement last week of the proposed SG amnesty make it important that we all find ways to ensure payment of SG. The community expects it.

    The reform journey

    In KPMG’s Superannuation Insights Report 2018, Paul Howes, KPMG Partner and National Senior Leader for Asset and Wealth Management, observed that: ‘Superannuation continues to be at the forefront of change and ongoing media attention’.

    Moving into 2018-19, reform remains as real as ever, as industry and the ATO seek to develop an often complementary pathway to support a super system that members value and benefit from in their retirement.

    While conscious of the pending Productivity Commission Report, let’s examine, in an illustrative sense, the current ‘pathway to reform’ across a range of areas which intersect often through APRA funds. There is a lot planned and it’s evident that what many of these changes have in common is the intent to bring to the fore how the super system operates and to ensure that decisions made are more visible to funds, members and regulators.

    While many of these matters are for government in terms of their broad policy settings, like you we also need to plan and focus on what needs to be done. It’s important to engage early and often, as we cannot achieve anything in isolation.

    On reflection, we could consider that the current cycle of super policy reform began in 2010-11 with policy and legislative reform.

    Some key reforms have involved the ATO as a service provider or clarifier of the law.

    Phase 1, what we call SuperStream, still ongoing, involved policy and legislative changes charging the ATO to design and deliver:

    • new enabling and digital services for interactions with funds
    • new data standards for contributions and rollovers between funds
    • improved and expanded provision of TFNs as a single identifier
    • currently underway are more digital and enabling services enabling ATO-to-fund interactions. More recently as part of the 2018 Budget, the government announced SuperStream was being extended to include SMSF rollovers, allowing SMSF members to initiate and receive rollovers electronically between an APRA fund and their SMSF.

    Phase 2 started with the 2016 Federal Budget policy measures which significantly reshaped the concessionary settings of super in terms of tax concessions, introducing a range of limitations and caps on what amounts, where and when an individual can contribute into super.Footnote1

    This was followed up by the 2017 Federal Budget announcements relating to housing measures which allow first-home savers to access their super and how others who may be downsizing can, in certain circumstances, contribute to their super.

    We’re now effectively moving into Phase 3, which is best reflected through the policy and machinery of government changes which have given the ATO the policy and legislative support necessary to continue to be key service provider, enabler and regulator across the super system.

    The areas expanding the ATO remit include administrative responsibility for the compassionate release of super; continued commitment to the Small Business Clearing House; the improved enforcement capacity of the ATO to monitor SG payments and of course the imminent introduction of Single Touch Payroll and its key connection to SG reporting and reporting by funds of SG payments.

    We’re naturally aware of the recent government announcement about the ‘proactive’ reuniting of super and the proposed amnesty of historical non-payment of SG. These matters are still going through the parliamentary and legislative process. Of course, these announcements are on top of initiatives already in place such as consolidating super accounts through myGov and improving SG compliance.Footnote2

    Some time ago, the ATO started to think about our increasing connectivity with the super industry, its operating environment and how this relates to our strategies and obligations. Some key elements have played out; in particular the need to share data and services which bring to life a greater degree of shared visibility. Indeed I believe we all saw there was a clear convergence across SuperStream, the 2016 Federal Budget measures, Single Touch Payroll and the technological and reporting expectations ahead of us all.

    To the extent that the super system could be monitored in a more timely way, it was clear future approaches and ‘builds’ needed to move away from annual reporting to members.

    We began this journey in earnest with industry in early 2017 and are well on the way to implementing a contemporary reporting framework that enables a move away from annual reporting through member contribution statements (MCS) to event-based reporting. To replace the annual MCS, we have designed with industry, and are now building, two new digital services for reporting between super funds and the ATO.

    The services are the member account attribute service (MAAS) and the member account transaction service (MATS). These will replace the annual MCS lodgment by funds each October.

    In December 2017 we sent formal advice to trustees requesting anticipated readiness dates for MAAS and MATS and now have a very clear picture of when funds will be on-boarded.

    The last MCS lodgment in the current format will be due by 31 October 2018 for the 2017-18 financial year.

    In April 2018, we released the MAAS service which allows funds to start on-boarding, with an extended cutover period through to October 2018. We have begun on-boarding with three funds and we will continue MAAS on-boarding until October 2018.

    From 1 July 2018, funds can start sending transactions through MATS and we have committed to be ready to receive member account transaction information from that date. The expectation is that full solutions will be in place by the compliance date of 1 April 2019.

    Since we’ve moved well beyond this strategy as a concept to now a reality, I can give you a sense of the scale and possibilities. What’s important is that by December we will have more than begun the practical move from a reliance on annual member contribution reporting and its inherent lag in data accuracy.

    With the full cooperation and efforts of many funds, at this stage, it is planned we will see reported:

    • 47 per cent of funds (99) will be reporting member account information (ie MATS)
    • this will result in member account information on 61 per cent (37.7M employer contributions) of members across all APRA funds
    • this will include first-time reporting on SG payments into a member’s account. By definition this will also tell us who has not received an SG payment.

    By the end of June 2019, we will have complete reporting from all funds on all their members.

    While ATO systems are prepared for the incoming volume, we continue to undertake capacity and resilience testing.

    Key focus areas for income tax obligations for super funds

    Our income tax approach to large APRA-regulated super funds follows the same ‘risk differentiation framework’ principles we apply to large public groups.

    Funds that comply with their income tax obligations earn a ‘justified trust’ rating where we can obtain assurance they’re paying the appropriate amount of tax under the law. The justified trust approach requires an evaluation that includes:

    • understanding a taxpayer’s tax governance framework
    • identifying tax risks, including those advised to the market
    • understanding significant and new transactions
    • understanding book-to-tax differences and ongoing tax effects.

    Historically, large funds generally show a willingness to work with us to meet their tax obligations and shape industry direction. We encourage trustees to self-review their tax positions and engage with us about any areas of uncertainty. The key focus areas include:

    • propagation – now that super funds are generally back in net capital gains positions, many had been considering whether their systems for parcel selection produce the most efficient outcome from a tax perspective. Public guidance on propagation PCG 2018/2 finalised on 30 May 2018 gives industry more certainty on our compliance approach to the use of propagation to select assets for disposal. Compliance resources will generally not be applied to propagation arrangements when seven particular circumstances or parameters are satisfied. The date of effect is 1 July 2018
    • data integrity from underlying investment systems – due to the necessity of outsourcing in the institutional investment environment, large super funds rely on data from third-party providers such as custodians and administrators. We’re focused on obtaining assurance over the data integrity from underlying investment systems through our Justified Trust program. Data integrity relies on a strong tax governance framework. Through the Justified Trust program, taxpayers will need to demonstrate strong tax governance by providing evidence that appropriate controls and processes are in place to ensure data integrity from third-party providers. Data from the financial services industry drives prefilling of tax return information, the data we share with the community through myGov
    • increased non-portfolio offshore investments – with the increase in non-portfolio offshore investments by large super funds utilising controlled entities such as foreign trusts and offshore limited partnerships, we are focused on their Australian tax outcomes
    • accelerating shift of assets to pension phase – this is a watch area for us. We will look at the tax outcomes of this activity.

    Next steps and reviewing the APRA Fund Diagnostic Report

    Looking ahead we’re now refreshing and reframing our thinking towards super in general and the report as well. Our vision is that ‘super needs to be seen, valued and owned so it promotes trust and confidence and people participate willingly in the system’.

    To achieve this vision we will focus on finding ways to:

    • provide access and visibility across all accounts and super services
    • provide support and guidance
    • collaborate with partners
    • provide automated engagement services (that are fit for purpose).

    In reimagining the APRA Fund Diagnostic Report we’re conscious that the program has been in place for four years so it’s time to revisit it, but secondly, and most importantly, the super landscape is being transformed by legislative, technological and reporting changes and expectations.

    As a consequence, the current report is reaching a tipping point and will no longer be capable of adequately managing more frequent digital interactions. In summary, the current model has reached its ‘end-of-life’ phase.

    Hence, it’s critical for the ATO to redesign the current framework to capture high volumes of more frequent digital interactions by automating the process. We’ll seek to update the indicators, benchmarks, risk hypotheses and data models to capture and make visible the emerging risks revealed by event-based reporting.

    We aim to work to meet industry’s evolving expectation for a new digital experience which offers self-service and near real-time reporting. Our initial thoughts are to move, as many OECD tax and super administrations have, to a justified assurance approach. This approach will also assess and confirm the existence, application and potential testing of relevant parts of the super data governance framework. We’re looking to develop a Justified Assurance Report on reporting obligations that will assure the ATO and funds that funds are meeting their super reporting obligations.

    We’ll continue to employ the quantitative measures that have worked so well to date but will update them significantly to adapt to changes in the environment.

    We’re also looking to develop more qualitative measures to supplement the ‘hard data’ measures we rely on almost solely today. We expect to develop a prototype in the near future. Once we’re happy with this we’ll consult with funds to co-design a final model. We look forward to your involvement in this process.

    For us this is an exciting development in the evolution of good governance and justified assurance which will benefit your members and their experience.

    Thank you.

    Footnote 1

    Transfer balance cap (TBC) reports:

    • As at 30 April 2018, the ATO has created 1.26M TBC reports (including 5,144 SMSFs that have reported for 8,700 members).
    • Between 3 January and 30 April 2018, the ATO issued 2,600 Excess Transfer Balance (ETB) determinations to individuals who had exceeded their TBC.
    • In April 2018, the ATO subsequently issued 1,800 ETB tax assessments to individuals who had exceeded their cap and rectified the excess.
    • In the week beginning Monday 30 April we started issuing commutation authorities to funds where the individual had not rectified the excess after being sent an ETB Determination. We issued approximately 550 commutation authorities to funds that week.
    • The ATO estimates 7,800 individuals are receiving a defined benefit income stream with a reported value in excess of $1.6M.

    Return to footnote 1 referrer

    Footnote 2

    myGov statistics:

    • As at 31 March 2018, 12.7M adults had a myGov account.
    • As at 21 May 2018, approximately 6.6M myGov account holders have linked to the ATO member service.
    • ATO online services started in 2014, with individuals being able to consolidate their super accounts using this service.
    • There have been about 11.81M super searches using the ATO online service since 2013-14. The breakdown by year is as follows:
      • 2013-14: 549,030 searches
      • 2014-15: 1.84M searches
      • 2015-16: 2.63M searches
      • 2016-17: 2.96M searches
      • 2017-18: 3.83M searches by 3.52M clients.
       
    • From 2013 to April 2018, 2.1M accounts were consolidated to the value of $10.72B.

    Return to footnote 2 referrer

      Last modified: 15 Jun 2018QC 56015