Monthly technical roundup - July 2023

Measures passed to strengthen rights to pursue unpaid super and changes to unpaid parental leave

On 30 June 2023, the Fair Work Legislation Amendment (Protecting Worker Entitlements) Act 2023 (Cth) received Royal Assent.

This Act amends a number of areas of the Fair Work Act 2009 (Cth), including:

Strengthen rights to pursue unpaid super

Allow employees to take legal action to recover unpaid superannuation. This is achieved by adding superannuation contributions to the list of minimum entitlements in the National Employment Standards (NES). Any employer who contravenes the proposed entitlement could be subject to a civil penalty, as is the current position for all contraventions of the NES.

This measure also complements the Australian Taxation Office’s (ATO) existing process to recover unpaid superannuation and creates an additional enforcement mechanism which employees can use in the event the employee’s superannuation entitlements have been underpaid, or not paid at all.

The changes will commence on 1 January 2024.

Unpaid parental leave (UPL)

Amendments aimed at strengthening an employee’s entitlement to flexible UPL by:

• allowing employees to take up to 100 days of flexible UPL (from 30 days), or a higher number as prescribed by regulation;
• allow employees to commence their UPL at any time in the 24 months following the birth or placement of their child; and
• allowing employees to take flexible UPL before and after a period of continuous UPL. Under the current provisions, when an employee takes a day of flexible UPL, they forfeit any remaining entitlement to take continuous UPL.

These changes came into effect on 1 July 2023.  

Financial Services Compensation Scheme of Last Resort

On 22 June 2023, the Treasury Laws Amendment (Financial Services Compensation Scheme of Last Resort) Act 2023 (Cth) (CSLR), the Financial Services Compensation Scheme of Last Resort Levy Act 2023 (Cth), and the Financial Services Compensation Scheme of Last Resort Levy (Collection) Act 2023 (Cth) passed both houses and received Royal Assent on 3 July 2023. Together, the Acts establish the CSLR.

The purpose of the CSLR is to provide compensation to victims of financial misconduct who have received an Australian Financial Complaints Authority (AFCA) determination in their favour that relates to a financial product or service within the scope of the scheme, but have not been paid by the relevant entity.

A consumer can apply to the CSLR operator for payment if they have not been paid in accordance with a relevant AFCA determination. The scheme’s operator must compensate the consumer if the eligibility criteria are met. Compensation payments are capped at $150,000.

The new laws provide the Minister with power to authorise a person as the operator of the CSLR, as long as the Minister is satisfied the person will meet the mandatory requirements.

The AFCA determination must relate to one or more of the following types of products or services:

• engaging in credit activity as a credit provider or otherwise;
• providing financial product advice which is personal advice to a retail client about one or more relevant financial products; and
• dealing in securities for a person as a retail client, other than issuing securities.

A relevant AFCA determination may include determinations made by AFCA before, on, or following the date the CSLR commences. The intention is for compensation under the scheme to be available for eligible complaints made to AFCA since its operation commenced on 1 November 2018.

Any compensation payment the consumer is eligible for under the CSLR will be reduced by the amount of any payment they are eligible for under another statutory compensation scheme for the matters covered by the determination. It will also be reduced by the amount of any payments made by the relevant entity, and any other payments made in accordance with regulations. Additionally, the consumer is ineligible to receive payment under another statutory compensation scheme for the same matters covered in the determination for an amount equal to or greater than the amount in the determination from AFCA.

To fund the scheme’s ongoing operation, a levy will be imposed on parts of the financial services industry. However, the establishment of the scheme and part of its initial operation will be funded by the Government.

Under the CSLR levy framework, an annual levy is payable by members of specified sub-sectors (within the meaning of the ASIC Supervisory Cost Recovery Levy Act 2017 (Cth)) and is intended to provide for:

• compensation payments to consumers;
• payment of AFCA’s unpaid fees;
• the establishment and maintenance of a capital reserve; and
• the re-imbursement of administrative costs incurred by the CSLR operator and ASIC in administering the scheme.

Compensation payments to eligible consumers by the CSLR operator can’t be made until after the commencement of the first levy period, which will begin on a day specified in a determination made by the Minister, and will end on 30 June 2024.

Subsequent levy periods will begin on 1 July and end on 30 June of the following year, meaning the second levy period will begin on 1 July 2024 and end on 30 June 2025.

Levy caps

A scheme levy cap will apply as part of the CSLR levy framework. The scheme levy cap is $250 million per levy period and is the maximum levy that may be imposed for any levy period across all persons across all sub-sectors.

A sub-sector levy cap will also be imposed, which is the total amount of the levy that may be imposed for the second levy period (and each subsequent levy period) across all members of a particular sub-sector. The sub sector levy cap is the highest of either:

• $20 million for a levy period and a sub-sector; or
• the amount prescribed by regulations (or worked out in accordance with a method prescribed by regulations) for the levy period and the sub-sector.

While the scheme levy cap can, under no circumstances, be exceeded, the sub-sector levy cap could be exceeded by a Ministerial determination imposing a special levy.

The scheme levy cap and the sub-sector levy cap do not apply to the costs for the first levy period payable by the Government.

Although there is no obligation to, the CSLR operator may make a revised claims, fees and costs estimate for the levy period and a sub-sector. This may, in turn, require a further levy for the levy period and a sub‑sector to be imposed, as a revised estimate could cause the total levy amount for the levy period and the sub-sector to exceed the sub-sector levy cap.

The Minister will have the power to make a determination that:

• allows the CSLR operator to make compensation payments to a specified class of consumers in specified instalments over a specified period of time, to allow the payment of compensation to be spread over a longer period of time;
• imposes a special levy for the levy period and the primary sub-sector (that is, the sub-sector to which the revised estimate relates), which exceeds the sub-sector levy cap for the levy period and the sub‑sector; or
• imposes a special levy for the levy period on more than one sub-sector (not just the primary sub‑sector) if, after considering the impact of the special levy amount on the financial sustainability and viability of the specified sub-sectors and on the broader financial system, the Minister considers it is necessary and is the most efficient way for the compensation payments to be made.

To fund the backlog of accumulated unpaid claims (and AFCA’s associated unpaid fees) relating to complaints made to AFCA between 1 November 2018 and 7 September 2022, Australia’s ten largest banking and insurance groups must pay a one-off levy. Health insurers and superannuation groups are not required to pay this levy.

The establishment of the CSLR, and the supporting levy framework, commenced on 4 July 2023.

Skills, training and technology boost

On 23 June 2023, the Treasury Laws Amendment (2022 Measures No. 4) Act 2023 (Cth) received Royal Assent.

The Act implements several measures announced in the March 2022 Federal Budget, aimed at encouraging small business to train and upskill their employees, as well as introducing temporary measures to support small businesses with their digital operations.

The measures allow businesses with an aggregated annual turnover of less than $50 million to:

• deduct an additional 20% of eligible expenditure incurred for external training (by a registered training provider) to upskill their employees. The eligible expenditure must be incurred from 7.30pm (by legal time in the Australian Capital Territory) on 29 March 2022 until 30 June 2024.
• deduct an additional 20% of eligible expenditure incurred on expenses and depreciating assets which support digital operations of the business. The eligible expenditure must be incurred between 7.30pm (by legal time in the Australian Capital Territory) on 29 March 2022 and 30 June 2023.

Education standards for experienced financial advisers and improving the flexibility of the First Home Super Saver (FHSS) Scheme

On 14 June 2023, the Treasury Laws Amendment (2023 Measures No. 3) Bill 2023 (Cth) was introduced to Parliament.

Education and training standards for experienced financial advisers

One of the measures contained in the Bill includes amendments to the Corporations Act 2001 (Cth) to better recognise the experience of existing financial advisers, as well as addressing technical limitations in the current framework that are relevant to both new entrants to the financial advice industry and tax agents providing a tax (financial) advice service to retail clients.

The amendments would deem an adviser to be an ‘experienced provider’ (and therefore do not need to undertake further study to meet the qualifications standard) if they:

• have 10 years (cumulative) of full-time equivalent experience between 1 January 2007 and 31 December 2021; and
• have a clean disciplinary record as at 31 December 2021.

Advisers would still be required to pass the financial adviser exam to be considered an experienced provider.

The legislation would also provide increased flexibility to the degree approval process for new entrants by allowing the Minister to approve qualifications where different study pathways were taken by the new entrant (currently the new entrant must complete all conditions prescribed by the approved qualification). The amendments also address cases where new entrants currently fail to meet the education standards for technical reasons, despite completing the substance of an approved degree.

Additionally, the legislation removes the need for advisers who are also registered tax agents to meet the additional education requirements to provide tax (financial) advice.

Other than contingent amendments, if passed, the amendments to the Bill commence on the day after Royal Assent.

Improving the flexibility of the FHSS Scheme

The Bill also contained four technical amendments to the legislation underpinning the FHSS Scheme, aimed at making the scheme more flexible. These changes include:

• increasing the discretion of the ATO to amend or revoke FHSS Scheme applications;
• allowing applicants to withdraw or amend their applications before receiving the FHSS Scheme amount, and allowing individuals who withdraw to re-apply for the FHSS Scheme in the future;
• allowing the ATO to return any FHSS Scheme amounts to superannuation funds, providing the amount has not been released to the individual; and
• clarifying that FHSS Scheme amounts that are returned to the ATO are treated as non-assessable non-exempt income (by the fund) and do not count towards the individual’s contribution caps.  

If passed, the amendments will commence on a day to be fixed by Proclamation. However, if the provisions do not commence within the period of 12 months beginning on the day the Bill receives Royal Assent, they commence on the day after the end of that period.

Non-arm’s length expense rules for superannuation funds

On 19 June 2023, the Government released a consultation paper seeking industry feedback on its proposed amendments to the non-arm’s length income (NALI) rules where the superannuation fund incurs non‑arm’s length expenses (NALE) as announced in the 2023 Federal Budget.

The Bill contains amendments to the Income Tax Assessment Act 1997 (Cth) proposing:

• excluding the application of the NALE rules to large APRA-regulated funds and exempt public sector superannuation funds;
• distinguishing between specific and general expenses for the purposes of NALE rules for general and specific expenses of the fund;
• setting the amount of income taxable as NALI from a general expense breach to be the maximum of twice the difference between the amount that would have been charged as an arm’s length expense and the amount that was actually charged to the fund;
• limiting the total amount taxed as NALI to the fund’s taxable income less assessable contributions and related deductions; and
• exempting expenses incurred or expected to have been incurred before 1 July 2018 from the application of the NALE rules.

The consultation period closed on 7 July 2023. 

Response to the Quality of Advice Review

On 13 June 2023, the Government announced the release of its response to the Quality of Advice review as part of its Delivering Better Financial Outcomes package.

The Government stated that the package of reforms will be progressed in three streams and aims to develop legislation over the coming year to deliver on these reforms.

Stream one – removing onerous red tape that adds to the cost of advice with no benefit to consumers

• removal of the Safe Harbour steps from the Best Interest Duty, with consultation to determine implementation details and implications of adopting the remaining parts of this recommendation;
• replacing the current Fee Disclosure Statement (FDS) requirements, renewal of ongoing fee arrangement into a single consent form;
• replacing Statements of Advice with an advice record that is more fit for purpose, with consultation to determine the final design of the replacement;
• making the provision of a financial service guide more flexible;
• introducing a standardised consumer consent requirement for classifying a consumer as a wholesale or sophisticated client;
• simplify or remove certain exemptions to the ban on conflicted remuneration;
• defer the consideration of a review of time-sharing schemes until after the completion of Treasury’s review into the regulatory framework for Managed Investment Schemes; and
• standardising the consumer consent requirement for life, general and consumer credit insurance commissions.

Stream two – expanding access to retirement income advice

• allowing superannuation trustees to provide personal advice to members about their superannuation interest and to consider broader circumstances when they provide advice on retirement matters; and
• allowing trustees to decide on how to charge members for the advice;

Stream three – exploring new channels for advice

• exploring the merits of expanding the provision of personal advice by financial institutions (in conjunction with stream two);
• reviewing the Financial Planners and Advisers Code of Ethics;
• broadening the definition of personal advice;
• removing the general advice warning;
• allowing non-relevant providers to provide personal advice;
• introducing a good advice duty; and
• amendments to the Design and Distribution Obligations.

The Government will consult industry and consumer stakeholders on the three streams over the coming months, and expects to issue its final response on the Delivering Better Financial Outcomes package later in 2023.

APRA Statement of Expectations

On 7 June 2023, the Government released an updated Statement of Expectations for APRA, outlining how it expects the prudential authority to carry out its responsibilities in regulating banks, insurance companies and superannuation funds. The Statement includes:

• the Government’s expectation of how APRA carries out its functions and exercise its powers;
• the Government’s policy priorities;
• how APRA manages its relationship with external stakeholders; and
• the Government’s expectation of how APRA manages matters relating to its organisation.

The Government was explicit in requiring APRA to consider risks related to climate change, including promoting transparency in relation to financial risks and the adoption of climate reporting standards.

In response, on the same day, APRA released a Statement of Intent, outlining how it will manage its relationship with the Government, other regulatory agencies and industry.

Superannuation performance test update

On 16 June 2023, the Government announced it will update the benchmarks used to measure a fund’s performance under the MySuper performance test, as well as extend the performance test to many more products in the Choice sector.

The Government stated the update is to address the unintended consequences that were identified in the Your Future, Your Super review, and the Government intends to update the regulations for the August 2023 performance test. The changes include:

• increasing the minimum testing period to be in line with the increase of the longer-term investment testing ‘lookback’ period;
• calibrating the key benchmarks to ensure funds are not unintentionally discouraged from investing in certain assets; and
• in assessing the representative administration fee for trustee-directed products, the benchmark for platform and non-platform products will be benchmarked against a median fee that is relevant to its category.

The Government also stated that it will continue to explore and consult on further changes to the performance test.

ASIC Industry Funding Model review

On 26 June 2023, the Government announced the Final Report on the Review of ASIC Industry Funding Model (IFM).

The review found that the settings of the ASIC IFM remained broadly appropriate, and that the existing framework could be uplifted by improving the way regulatory costs are recovered and communicated to the industry.

The review also contained 10 recommendations where four were directed to ASIC. The four recommendations include:

• spreading the costs of certain regulatory activities (e.g. taking action against unlicenced operators, regulating emerging sectors, and capital expenditure) either across a wider population or over time;
• undertaking further consultation to ensure sub‑sector definitions, metrics and formulas used to calculate the levies remain fit‑for‑purpose;
• delegating ASIC with fee‑setting powers to ensure the fees continue to reflect full cost recovery; and
• ASIC to improve its reporting, transparency, and consultation arrangements on the IFM.

The Government also reviewed the temporary levy relief for personal financial advice licensees that was in place for 2020‑21 and 2021‑22 and noted that the temporary levy relief for this sub‑sector will not be extended.

May 2023 adviser exam results

On 16 June 2023, ASIC released the results of the financial adviser exam held in May 2023.

Of the 195 candidates who sat the exam, 63% passed. In releasing the results, ASIC has also stated that to date, 20,570 candidates have sat the exam and over 92% of those candidates have passed.

The next exam sitting will be held on 10 August 2023 and the last day to enrol for that sitting is 21 July 2023.

Call on super trustees to appropriately deal with member money upon receipt

On 26 June 2023, ASIC announced it was calling on superannuation trustees to make sure they were meeting their legal obligations for managing incoming money from members if a new or increased interest in a superannuation product could not be issued by the next business day.  

This follows ASIC’s review of a sample of 12 superannuation trustees to understand how they met the requirements for dealing with money received for a financial product set out in the Corporations Act 2001 (Cth).

The four main issues ASIC found among the trustees reviewed were: 

• some trustees were using non-compliant accounts to hold the money;
• several trustees did not retain the money in a compliant bank account until the time an interest in a product was issued/increased;
• some trustees did not have the required monitoring arrangements in place to manage their member’s money appropriately; and
• most disclosure materials were inadequate and required improvement.

Industry funding: 2022-23 Cost Recovery Implementation Statement

On 28 June 2023, ASIC published its Cost Recovery Implementation Statement (CRIS) for 2022-23.

The CRIS contains information on how ASIC implements the industry funding model to recover the costs associated with their regulatory activities for each industry subsector, as well as its user-initiated and transaction-based regulatory costs via fee for service for the 2022-23 financial year.

The figures in the CRIS are indicative only and ASIC will publish the final levies in December 2023 and issue the invoices between January and March 2024.

Warning to super trustees to consolidate duplicate member accounts

On 29 June 2023, ASIC issued a warning to super trustees to boost their efforts to consolidate duplicate member accounts.

The warning follows an ASIC review of nine trustees, covering both industry and retail funds, where ASIC assessed how those trustees are meeting their obligation to annually identify and automatically consolidate duplicate member accounts within a superannuation fund to minimise fees.

Other concerns raised from the review include:

• the lack of documented procedure by some trustees for identifying and consolidating duplicate accounts;
• one trustee failed to undertake some form of best interest assessment in managing duplicate accounts;
• the nature of the contact varied when trustees contacted their members about their duplicate accounts; and
• the lack of oversight over the process of consolidating duplicate accounts, and instead rely on the administrator of the fund to have a process in place.

Residency tests for individuals

On 7 June 2023, the ATO finalised TR 2023/1, which outlines the residency tests for individuals for tax purposes as set out in Income Tax Assessment Act 1997 (Cth), and when the Commissioner considers that a person will be a resident of Australia.

The Ruling explains that the definition of ‘resident of Australia’ has four alternative tests, and states that if an individual meets one or more of the tests, they would be considered a resident.

The four residency tests are:

• ordinary concepts test;
• domicile test;
• 183-day test; and
• Commonwealth superannuation fund test.

The Ruling also consolidated and replaced the material of three tax rulings and the views reflected in those rulings were updated to take into account developments in case law.

Diverting profits of SMSF property developments

On 15 June, the ATO issued Taxpayer alert (TA 2023/2) Diverting profits of a property development project to a self-managed superannuation fund, through use of a special purpose vehicle, involving non-arm's length arrangements.

The ATO advised that it was currently reviewing arrangements under which:

• one or more self-managed super funds (SMSFs) have, or acquire, direct or indirect ownership of a special purpose vehicle (SPV) that undertakes a property development project, and
• because of the non-arm's length arrangements between the SPV and other entities, the SPV derives a profit that in turn benefits the SMSFs by more than what it would have been, if all parties had dealt with each other at arm's length.

The ATO stated that arrangements where profits of related entities were shifted to an SMSF to be concessionally taxed, and that the SPV is a company, the ATO may deem the dividends and other income received by the SMSF to be non-arm’s length (NALI) income (tax of 45% may apply).

The ATO also urged trustees of, or advisers to, SMSFs to refer to the SMSF Regulator's Bulletin Self-managed superannuation funds and property development on how SMSF trustees can ensure they meet their income tax and regulatory obligations when participating in property development activities.