Monthly technical roundup - May 2023

Education standards for experienced financial advisers and technical fixes for new entrants

To deliver the Government’s election commitment to better recognise experienced financial advisers, the Government released for consultation exposure draft legislation and explanatory materials on 18 April 2023.

The draft legislation would deem an adviser to have met the education requirements 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 adviser.

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 advisers 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. This will enable them to provide tax (financial) advice without needing to undertake additional study.

The consultation period closed on 3 May 2023.

Legislation to address work test anomaly

On 19 April 2023, the ATO released draft Legislative Instrument 2023/D11 and an explanatory statement for consultation. The legislative instrument addresses a technical issue affecting the work test, which applied under the Income Tax Assessment Act 1997 (Cth) (ITAA 1997) from 1 July 2022.

The commencement of the Treasury Laws Amendment (Enhancing Superannuation Outcomes for Australians and Helping Australian Businesses Invest) Act 2022 (Cth) essentially relocated the work test (governed under the Superannuation Industry (Supervision) Regulations 1994 (Cth) (SISR) and the Retirement Savings Accounts Regulations 1997 (Cth) (RSAR)) to the ITAA 1997. As a result of this change, a work test no longer applies to the acceptance of contributions and a new work test must be met for individuals to claim a tax deduction for personal contributions made from age 67 to 75 (up to 28 days after the month the individual turned 75).

However, the work test which previously existed in the SISR and RSAR had an expanded definition of 'employee’ which captured a range of individuals as employees who may not otherwise be common law employees.

In contrast, there is no definition of ‘employee’ under the ITAA 1997 and as such, it takes its ordinary common law meaning.

Examples of roles which are not considered employees under common law include:

• company directors;
• constitutional or statutory office holders;
• parliamentarians; and
• members of the Australian Defence Force.

The instrument resolves this technical issue by modifying section 290-165(1A) of the ITAA 1997 such that individuals who are employees under the Superannuation Industry (Supervision) Act 1993 (Cth) are capable of meeting the work test for the purpose of claiming a tax deduction for personal contributions.

The consultation period closed on 5 May 2023.

Your Future, Your Super Review outcomes

Following the review of the Your Future, Your Super (YFYS) laws, the Government announced the release of Exposure Draft Legislation seeking feedback on its proposal to address any unintended consequences of the YFYS laws, as well as issues raised from previous consultations.

The Government stated that feedback from stakeholders primarily focused on the annual performance test (intended to hold trustees to account to maximise returns for its members) and the proposal will address several issues identified in the review.

The key updates relating to the performance test include:

• increasing the testing period from eight years to ten years to encourage longer-term investing decisions;
• calibrating the key benchmarks to ensure funds are not unintentionally discouraged from investing in certain asset classes;
• adjustments to the notification letter which trustees must send to members of failed products;
• minor amendments to improve accuracy and reduce the administrative burden for APRA; and
• ensuring the performance test is fit-for-purpose before it is extended to trustee-directed products.

The Government also recognised that stapling can generate a significant administrative burden on employers and will seek to address some of the issues identified in the current system. The Government was also anticipating the release of an IT service by the ATO which would streamline the stapling process.

The consultation period closed on 2 May 2023 and the updates will be implemented prior to the August 2023 performance test.

Super trustees told to focus on their communications about performance test failure

On 12 April 2023, ASIC announced that it had reviewed the communications made by trustees to members in MySuper products that failed the annual performance test for a second consecutive year in 2022. For those MySuper products, the trustees are prohibited from accepting new members under the law.

ASIC highlighted that while improvements have been made, some trustees need to take a more member-centric approach in their communications.

Areas for improvement included:

• putting in place a cohesive communication strategy, and consider from a member’s perspective the timing and communication the member will receive;
• providing consistent messaging about the performance on the fund’s website;
• ensuring that communications about short-term performance, products and mergers are balanced and it does not undermine the fact that the product failed the performance test; and
• providing clear call-centre transcripts for staff to discuss the performance failure or product closure and related options with members.