Second Reading SpeechMr McCormack (Minister for Small Business)
That this bill be now read a second time.
Today I introduce a bill to amend the legislation implementing the government's superannuation taxation reform package. These changes support the integrity of the superannuation taxation reform package and ensure that it functions as intended.
The bill also includes refinements to changes to personal and corporate insolvency law made by the Insolvency Law Reform Act 2016. These refinements will reduce legal complexity, increase certainty for insolvency practitioners and remove unnecessary costs from insolvency proceedings. The amendments also assist the Fair Entitlements Guarantee Recovery Program in its work reclaiming funds paid out under the program.
For the benefit of the House, allow me to take you through the contents of the bill in some detail.
Schedule 1 of the bill makes changes to measures in the superannuation taxation reform package announced in the 2016-17 budget that were enacted through the Treasury Laws Amendment (Fair and Sustainable Superannuation Act) 2016. The changes support the integrity of the superannuation taxation reform package and ensure that the law operates as intended.
The Turnbull government's superannuation taxation reform package delivered the most comprehensive suite of superannuation taxation reforms in a decade, improving the fairness, sustainability, flexibility and integrity of the superannuation system.
As our population ages and fiscal pressures increase, it is important that our superannuation system is used for its core purpose of providing income in retirement to substitute or supplement the age pension and not for tax minimisation or estate planning purposes.
The superannuation taxation reform package made sure that the superannuation system is fair and more sustainable by ensuring superannuation tax concessions are well targeted and affordable. It also introduces important flexibility measures that will provide more Australians with the opportunity to become self-sufficient in retirement.
In the process of implementing these reforms, concerns were identified about the ability of self-managed superannuation fund (SMSF) members to circumvent the new cap on tax-free retirement phase assets through the use of limited recourse borrowing arrangements (known as LRBAs).
The integrity concern being addressed in schedule 1 of this bill will ensure that SMSF members are not able to use an LRBA to facilitate the payment of retirement phase liabilities from accumulation phase income.
This measure will ensure that LRBA repayments that have the effect of shifting value into the tax-free retirement phase will be captured by the transfer balance cap.
The measures will only apply to LRBAs that are entered into on or after 1 July 2017. They do not apply to LRBAs that were in place before 1 July 2017, refinancing of the outstanding balance of these LRBAs or contracts entered into before 1 July 2017.
This integrity measure supports the government's superannuation taxation reform package by ensuring that tax concessions are better targeted and sustainable. These measures are not about banning borrowing by SMSFs, but about ensuring that borrowing is used appropriately.
Schedule 1 also introduces a number of minor and technical amendments that will ensure that the superannuation taxation reform package operates as intended.
Amendments in the schedule ensure that pooled superannuation trusts, which are wholesale investment vehicles for a complying superannuation fund, can access the capital gains tax relief provided to other superannuation funds. This relief supports superannuation providers in rebalancing their asset pools as individuals adjust their affairs to comply with the transfer balance cap or the transition to retirement income changes (or both). This ensures that member outcomes are protected.
Importantly, the schedule also introduces changes to the treatment of structured settlements and personal injury orders under the transfer balance cap to ensure people who receive compensation orders of this nature as a result of suffering a serious or catastrophic injury are exempted from the transfer balance cap as intended. This will ensure those who need access to large amounts of funds to meet their daily healthcare and living needs, will not face a faster depletion of their lump sum. Following these amendments, an individual with an existing structured settlement or personal injury order will now receive a debit equal to the value of their income streams on 30 June 2017. This ensures that these vulnerable individuals never breach their cap, and that earnings on a structured settlement or personal injury order are not counted against an individual's transfer balance cap, regardless of when the contribution is made.
The schedule also clarifies that earnings on income streams for individuals who have satisfied a nil condition of release, generally by retiring or reaching age 65, are to remain tax free. Consequently, where the superannuation provider is satisfied that a member has reached a nil condition of release, transition to retirement income streams will now be eligible for an earnings tax exemption. A superannuation provider will generally be satisfied when the member notifies them that they have satisfied a nil condition of release, or when the provider knows the member has reached age 65. And the eligibility is prospective-it only applies when the provider is satisfied the condition of release is reached, regardless of when it was actually reached.
The schedule also introduces a new regulation-making power to support the operation of the transfer balance cap. With this regulation making power, the government will be able to define new credits and debits that apply against a person's transfer balance cap. This will ensure that the transfer balance cap continues to operate as intended as superannuation products evolve and change. In the near term, this provision will enable regulations to be made to ensure that innovative income streams are treated appropriately under the transfer balance cap.
During the course of consultation, concerns were raised that reserves could be used to circumvent changes in the Superannuation Taxation Reform Package. The schedule does not make changes to the current treatment of reserves. The Australian Taxation Office will continue to monitor the use of reserves to ensure that they are not being used to circumvent the law.
Finally, the schedule also contains a number of minor and technical amendments that address some minor and technical errors in the law.
Schedule 2 of this bill refines changes made to personal and corporate insolvency law by the Insolvency Law Reform Act 2016. These refinements will reduce legal complexity, increasing certainty for insolvency practitioners and removing unnecessary costs from insolvency proceedings. The amendments also assist the Fair Entitlements Guarantee Recovery Program in its work reclaiming funds paid out under the program.
To increase confidence in insolvency practitioners, the Insolvency Law Reform Act introduced a prohibition against an insolvency practitioner deriving a profit from an administration, except as approved by the Corporations Act 2001 or the Bankruptcy Act 1966. As drafted, the prohibition may create unnecessarily high compliance costs. This schedule clarifies the operation of the prohibition and removes the requirement for creditors to approve a single profit or advantage each time it is on-paid to a related entity of the practitioner including, for example, payments made to the practitioner's employees in the ordinary course of their employment. These amendments will reduce costs without weakening the prohibition's intended protective purpose.
This schedule also repeals a provision inserted by the Insolvency Law Reform Act which prevents public access to reports made by controllers appointed by creditors to manage their assets during liquidation. The Fair Entitlements Guarantee Recovery Program relies on information contained in these reports to verify a controller's compliance with their obligation to pay employees of the company out of the assets under their control. Repealing the provision ensures that the Fair Entitlements Guarantee Recovery Program can access the information it needs to reclaim funds paid out under the Fair Entitlements Guarantee.
This schedule contains other minor refinements that will increase legislative certainty and create clarity for both insolvency practitioners and regulators.
Full details of the measures are contained in the explanatory memorandum.