Monthly technical roundup - August 2023

Modernising the individual tax residency rules

On 21 July 2023, the Government released a consultation paper seeking feedback on a new individual tax residency framework. The new framework was based on recommendations made by the Board of Taxation in its 2019 final report Individual Tax Residency Rules – a model for modernisation, and was one of the proposals that was announced in the 2021-22 Federal Budget by the former Government.

The proposed model introduces a two-step approach:

Primary tests

• The 183-day Test: the primary test would be a simple 'bright line' test in which a person would be an Australian tax resident (from either 1 July or their date of arrival, depending on whether they were a tax resident in the previous income year), if they are physically present in Australia for 183 days or more in any income year; or
• The Government Officials Test: the test would replace the Commonwealth superannuation test to ensure that government officials (including federal, state and territory) deployed overseas in the service of the Australian government are tax residents throughout their deployment. An official who meets this test would be a tax resident, even if they don’t meet the 183-day test or the secondary tests.

Secondary tests

Four secondary tests will be introduced to simplify the existing rules by employing targeted, objective criteria, with no requirement to test intention or undertake broad, holistic examinations of all relevant facts and circumstances. These secondary tests would be applied to individuals who do not meet the primary test.

The closing date for all submissions is 22 September 2023.

Proposal to remake the Financial Claims Scheme Prudential Standard

On 26 July 2023, the Australian Prudential Regulation Authority (APRA) released for consultation its proposal to remake Prudential Standard APS 910 Financial Claims Scheme (APS 910), which is due to sunset on 1 October 2023.

The standard requires authorised deposit-taking institutions (ADIs) incorporated locally to be pre-positioned for the Financial Claims Scheme (FCS), where in the unlikely event of a failure of a bank, credit union, building society or general insurer, the FCS would provide protection for deposits up to $250,000 per account holder per ADI.

APRA also plans to commence a comprehensive review of APS 910 at a later date, so as to consider lessons learned from recent international events.

Consultation closes on 23 August 2023.

Effectiveness and capability review of APRA

On 13 July 2023, the Government announced the release of the Financial Regulator Assessment Authority’s (FRAA) Report which looked into the effectiveness and capability of APRA’s supervision and resolution functions within the superannuation industry.

In general, the FRAA agreed with APRA’s self-assessment that its supervision function within superannuation is effective and capable, and also noted that feedback from the broader range of stakeholders was generally positive.

The report also contained five recommendations aimed at making APRA’s regulations of the superannuation industry more forward looking, and better prepare the industry and financial system for future shocks. The recommendations include:

1. increasing its efforts to identify risks in superannuation (including emerging and systemic risks);
2. prioritising and investing in initiatives to recruit, train, retain and develop its staff to build appropriate skills and industry knowledge to manage and respond to emerging and systemic risks;
3. continuing to invest in its data, technology capabilities and processes to provide timely insights, allow effective internal collaboration, and minimise regulatory burden associated with data and information requests;
4. providing trustees with annual plans of proposed supervisory activity, keeping trustees informed of the status of reviews, information requests and other supervisory activities. APRA should also consider publishing its methodologies and more detailed insights to build public awareness and enable interested parties to comment in relation to its thematic reviews, as well as considering more timely communication and detailed insights across industry so as to increase awareness of risks and promote better practices; and
5. prioritising the development of its resolution capability and working closely with industry to lift awareness of recovery and resolution planning requirements.

APRA has also released its response to the Report, stating that APRA supported the recommendations and will address them. APRA’s Corporate Plan will be released next month and will include the recommendations.

Disrupting investment scams with the National Anti-Scam Centre’s first fusion cell

On 3 July 2023, ASIC released details of The National Anti-Scam Centre which was established to co-ordinate an investment scam fusion cell to address the growing number of investment scams, which costs Australians in excess of $1 billion per year.

Led by the ACCC and ASIC, and including representatives from the banks, telecommunications industry and digital platforms, the investment scam fusion cell will be the first fusion cell co-ordinated by the new Centre which will identify methods for disrupting investment scams to minimise losses.

These cells are time-limited taskforces which are designed to bring expertise from government and the private sector together to address specific and urgent problems in a timely manner. A series of fusion cells with different participants to target particular scam types will be co-ordinated, and its outcomes will be reported publicly.

Initially, the investment scam fusion cell will be set up for six months, where they will aim to:

• disrupt investment scams (early intervention), including stopping scammers from reaching potential victims;
• remove investment scam websites from the internet;
• assist the private sector to take descriptive actions by sharing information about investment scams;
• provide information to the public to avoid investment scams; and
• identify intelligence for referral to law enforcement in Australia and overseas.

Review of insurance target market determinations

On 18 July 2023, ASIC announced it had sent letters to the Insurance Council of Australia, the Council of Australian Life Insurers and the Financial Services Council about its findings after it had examined over 100 Target Market Determinations (TMDs) for general and life insurance products against the TMD requirements that are set out in the Corporations Act 2001 (Cth) and ASIC Regulatory Guide 274 Product design and distribution obligations (RG 274).

ASIC’s view was that the products reviewed represent higher risk and/or potential for poor value to consumers, and outlined improvements the insurers could make to their TMDs.

Cyber security gaps found in compliance with CPS 234

On 5 July 2023, APRA announced its early findings from an expansive study on cyber resilience in financial services.

The assessment required APRA’s regulated entities to appoint an independent auditor to assess their compliance with prudential standard CPS 234 Information Security (CPS 234). The standard’s purpose is to ensure that regulated entities have baseline prevention, detection and response capability to withstand cyber security threats.

From the first tranche of assessment, APRA identified the following control gaps:

• incomplete identification and classification of critical and sensitive information assets;
• limited assessment of third-party information security capability;
• inadequate definition and execution of control testing programs;
• incident response plans not regularly reviewed or tested;
• limited internal audit review of information security controls; and
• inconsistent reporting of material incidents and control weaknesses to APRA in a timely manner.

APRA will further engage with the industry to lift the benchmark for cyber resilience as well as continue to work with APRA’s regulated entities to meet CPS 234 requirements.

New prudential standard on operational risk finalised

On 17 July 2023, APRA released its finalised Prudential Standard CPS 230 Operational Risk Management (CPS 230), which is designed to ensure that an APRA-regulated entity (such as banks, insurers and superannuation trustees) is resilient to operational risks and business disruptions.

The new standard provides the foundation to:

• strengthen operational risk management by introducing new requirements to address weaknesses in existing controls;
• improve business continuity planning so that entities are positioned to respond to severe disruptions; and
• enhance third-party risk management by ensuring risks from material service providers are appropriately managed.

The new standard will commence from 1 July 2025.

APRA also released for consultation draft Prudential Practice Guide CPG 230 Operational Risk Management (CPG 230) to assist the regulated entities with the implementation of CPS 230, and the consultation period for the draft guidance will close on 13 October 2023.

Thematic review of Retirement Income Covenant released

On 18 July 2023, APRA announced the release of an information report detailing the findings of APRA and ASIC’s joint thematic review of the implementation of the retirement income covenant (“the covenant”), which came into effect on 1 July 2022.

APRA and ASIC reviewed the progress made by 15 superannuation trustees that were responsible for 16 industry, corporate and public sector superannuation funds and found that while trustees were improving their offerings of assistance to members in retirement, the quality of approach varied and there was a lack of urgency in embracing the intent of the covenant.

The key findings contained in the information report include:

• Understanding members’ needs – trustees were relying on incomplete data which were critical in developing an effective retirement income strategy.

The report recommended trustees address the fundamental data gaps to support effective strategy formulation and enhance their modelling/analytics to better understand their members' needs.

• Designing fit-for-purpose assistance – the measures put in place by trustees weren’t robustly tracking member usage of assistance and a sizeable portion of them lacked concrete plans to address the gaps identified in the types of assistance.

The report recommended trustees tailor their communication and other assistances to members to cater to diverse member preferences, and address any assistance gaps by implementing regular testing and appropriate metrics to track the effectiveness of assistance offered.

• Overseeing strategy implementation – some trustees hadn’t embedded their strategies into concrete actions in their business plans, and a majority of the trustees lack metrics to assess the retirement outcomes provided to members.

The report recommended that trustees integrate their retirement income strategy with their business planning cycles and develop metrics that are focused on member outcomes to measure success of their strategy.

Final investment governance guidance for super trustees

On 20 July 2023, APRA announced that it had updated Prudential Practice Guide SPG 530 Investment Governance (SPG 530) to assist superannuation trustees in meeting APRA’s requirements in relation to investment governance under Prudential Standard SPS 530 Investment Governance (SPS 530), which came into force on 1 January 2023.

SPG 530 provides:

• additional guidance to support trustees in meeting their requirements relating to liquidity management, stress testing and asset valuations;
• an outline of how APRA expects trustees to consider environmental, social and governance risk factors as part of their overall investment risk management;
• greater clarity in areas requested by industry in applying the standard; and
• a more streamlined approach to guidance and bringing SPG 530 in line with APRA’s Modernising the Prudential Architecture strategic initiative.

First Home Super Saver Scheme update

On 25 July 2023, the ATO updated data on the operation of the First Home Super Saver (FHSS) Scheme since its commencement in July 2018.

Some of the highlights from the data for the 2021-22 financial year (most recent year) include:

• around 12,500 release requests were made to the ATO totalling $170.4 million;
• around 9,500 payments were made to individuals totalling $141.7 million;
• around 57% of total release requests were submitted by individuals aged 26-35;
• around 65% of total release requests were submitted by individuals who had a taxable income of $45,001 to $120,000; and
• 86% of FHSS release requests where completed within 25 days.