Monthly technical roundup - February 2023

Amendments to NALI rules for superfunds

On 24 January 2023, the Government released a consultation paper seeking industry feedback on its proposed amendments to the non-arm’s length income (NALI) provisions which apply to superannuation funds.

While the NALI provisions have broadly operated as intended (integrity measure to prevent income from being diverted into superannuation funds to benefit from lower rates of tax), industry stakeholders have raised the potential for disproportionately severe outcomes for breaches relating to general expenses.

The two proposed amendments contained in the paper include:

• applying a factor-based approach for SMSFs and SAFs which sets an upper limit on the amount of fund income taxable as NALI due to a general expenses breach. The maximum level of income taxed at the highest marginal tax rate would be five times the level of the general expenditure breach. Where the amount calculated exceeds the total fund income, all fund income will be taxed at the highest marginal rate; and
• exempting large APRA-regulated funds from the NALI provisions for general expenses.

The above amendments would only change the NALI provisions that apply to breaches involving expenses of a general nature and mitigate the ‘tainting effect’ (currently all income of the fund is potentially subjected to the highest marginal rate when a relatively minor breach relating to a general expense occurs). Where a non-arm’s length expenditure relates to a specific asset, the current NALI rules would continue to apply.

The changes are proposed to start from 1 July 2023 and the closing date for all submissions is 21 February 2023.

Improvements to Corporations and Financial Services Law

On 12 December 2022, the Government released  exposure draft legislation and explanatory materials seeking industry feedback on its proposed changes aimed at improving and simplifying the navigability of the Corporations and Financial Services laws.

The draft legislation:

• creates a single glossary of defined terms in section 8 of the Corporations Act 2001(Cth) and unfreeze the Acts Interpretation Act 1901 (Cth) so that it applies to the Corporations Act 2001(Cth) and the Australian Securities and Investments Commission Act 2001 (Cth);
• repeals definitions that are no longer used, cross-references to repealed provisions and other redundant provisions;
• amend the law to address unclear or incorrect provisions; and
• simplify unnecessary complex provisions (particular focus on terms with more than one meaning) and defining substantive obligations.

The consultation period closed on 15 January 2023.

Financial adviser registration delayed

On 15 December 2022, the Corporations Amendment (Registration of Relevant Providers) Regulations 2022 was registered to delay the requirement for Australian Financial Services (AFS) licensees to register their financial advisers who provide personal advice to retail clients on the Financial Adviser Register by six months to 1 July 2023.

Abolition of the Administrative Appeals Tribunal

On 16 December 2022, the Government announced that it intends to abolish the Administrative Appeals Tribunal (AAT) and replace it with a new federal administrative review body, where the new body will be led by a dedicated taskforce within the Attorney-General’s Department.  

The Attorney General’s Department website also states that all cases currently before the AAT will continue, and many of those cases will be decided or finalised before the abolition of the AAT. The cases that remain after the new body is established will be transitioned to the new body.

Updated guidance on SMSF advice

In December 2022, ASIC updated its guidance on personal advice to SMSFs via Information Sheet 274 Tips for giving self-managed superannuation fund advice (INFO 274).

The new guidance consolidated and replaced previous Information Sheets (INFO 205 and INFO 206) and helps advice providers comply with their legal obligations when providing advice to SMSFs.

One key change made by ASIC was the removal of references to a specific minimum account balance and highlighted that an account balance is only one of many factors an adviser needs to consider when assessing whether an SMSF is appropriate for a client.  The other factors to consider include:

• whether the client understands the responsibilities and obligations associated with an SMSF;
• whether the client has the resources and experience to meet their trustee responsibilities;
• whether the client experiences any relevant vulnerabilities (e.g. cognitive impairment);
• the costs associated with the arrangement;
• whether the client has any future plans to move overseas which may impact their ability to meet the residency rules; and
• other arrangements that may still provide the benefits of an SMSF, such as an APRA-regulated fund with a member directed investment facility.

ASIC has also provided case studies to assist advisers with their assessments.

November 2022 adviser exam results

On 8 December 2022, ASIC released the results of the financial adviser exam which was held in November 2022.

Of the 282 candidates who sat the exam, 57% passed. In releasing the results, ASIC has also stated that to date, 20,309 candidates have sat the exam and over 92% of those candidates have passed.

The next exam sitting will be held on 16 February 2023 and the last day to enrol for that sitting was on 30 January 2023.

Super trustees on notice to uplift complaints handling

On 9 December 2022, ASIC announced that it had placed superannuation trustees on notice to improve their internal dispute resolution systems after a targeted review of trustee compliance found that some trustees had sub-standard arrangements in managing complaints.

The review was aimed at assessing whether a selection of trustees met their obligations under Regulatory Guide 271 Internal dispute resolution (RG 271) and ASIC published its findings in Report 751 Disputes and deficiencies: A review of complaints handling by superannuation trustees (REP 751).

Some of the key concerns highlighted by ASIC include:

• ASIC found that a significant portion of complaints relating to superannuation (excluding complaints relating to an objection to the distribution of super death benefits) were not responded in a timely manner (RG271 sets a maximum timeframe of 45 days unless an exemption applies);
• most trustees failed to keep all complainants informed of the progress of their complaint, which could delay the complainant in exercising their rights to take their complaint to AFCA;
• there are gaps in how most trustees manage systemic issues that could be identified through the complaints or how they could use intelligence to improve their products and services; and
• the internal reporting systems often lacked sufficient detail to identify, much less remedy deficiencies in complaints handling.

ASIC expects those trustees that had sub-standard arrangements to take prompt action to remedy the issues identified and for the majority of those trustees to report to ASIC on the improvements made.

FAR to display whether an adviser can provide tax (financial) advice

On 6 January 2023, ASIC announced that from 1 February 2023, the Financial Adviser Register (FAR) will display whether an adviser can provide tax (financial) advice to retail clients.

ASIC also updated Information Sheet 268 FAQs: Relevant providers who provide tax (financial) advice services (INFO 268) and published a flowchart which can assist advisers in determining whether they can provide tax (financial) advice services to retail client as a relevant provider.

MySuper Heatmap updated

On 15 December 2022, APRA announced that it had updated the MySuper Heatmap, which evaluates all MySuper products’ performance in the areas of investment return, fees and costs and long-term sustainability of member outcomes.

Some of APRA’s key findings include:

• the fees for most MySuper products have fallen since the publication of the 2021 heatmap and APRA estimated that 8.1 million members have experienced a drop in disclosed total fees;
• since the release of the first heatmap in 2019, 28 MySuper products (containing $51.6 billion in member benefits) have closed;
• there are 350,000 fewer members in MySuper products with ‘significantly poor’ investment performance than in 2021. However, around 800,000 members still remain in underperforming products; and
• sustainability pressures exist across the industry, with most superannuation funds posting negative growth over the last three years across one or more heatmap sustainability metrics.

Final guidance on trust reimbursement agreements

On 12 December 2022, the ATO announced that it had finalised its guidance on trust reimbursement agreements where section 100A of the Income Tax Assessment Act 1936 (Cth) may apply:

• Taxation Ruling TR 2022/4 Income tax: section 100A reimbursement agreements
• Practical Compliance Guideline PCG 2022/2 Section 100A reimbursement agreements – ATO compliance approach.

Broadly speaking, where a beneficiary’s trust entitlement arose from a reimbursement agreement and the following criteria is met, anti-tax avoidance rules may apply:

• a reimbursement arrangement involved an arrangement under which a beneficiary was made presently entitled to trust income;
• someone other than the beneficiary received a tax benefit in connection with the arrangement; and
• at least one of the parties entered into the agreement for the purpose of reducing tax.

Where section 100A applies, the trustee (rather than the beneficiary) would be liable to tax at the top marginal tax rate.

In the media release, the ATO also confirmed that it would not retrospectively change their views on how the law operates as taxpayers relied on previous guidance for agreements that were entered into between 1 July 2014 and 30 June 2022.