A budget of costs and complexity

The Government’s 2017 Budget changes to financial services may have been modest but Mike Taylor writes that they will come at considerable cost.

There were neither surprises nor controversies in the 2017/18 Federal Budget for the Australian financial services industry but what it has delivered is another layer of regulatory complexity.

The two Budget announcements with direct implications for the financial services industry will add to the regulatory compliance burden already being carried by superannuation funds and banking institutions – The First Home Super Savers Scheme and the over 65 home downsizers regime.

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And the regulatory burden implications of the Budget announcements need to be weighed against the fact that the superannuation industry is only now coming to terms with the costs and implications of the multitude of changes announced in last year’s Budget.

This much was revealed in an Association of Superannuation Funds of Australia (ASFA) submission to the Australian Taxation Office (ATO) dealing with the [Taxation] Commissioner’s Remedial Powers Superannuation: Transitional Capital Gains Tax (CGT) Relief for Unsegregated Superannuation Funds.

What becomes clear in that submission is that a year after the 2016/17 Federal Budget, its regulatory implementation remains a work in progress with some superannuation funds concerned about the likelihood of considerably increased costs.

In particular, funds have signalled they are concerned about the proposed CGT relief regime, pointing out that it is likely to be both problematic and expensive.

“Whilst the theory behind the transitional CGT relief is logical, the assessment undertaken by many large unsegregated superannuation funds and their custodians since the legislation was finalised (and even earlier when the exposure draft version was released for consultation) is that there are significant practical challenges that may prevent them from accessing the relief,” the submission said.

“The single biggest impediment is that at least some of the custodians of superannuation funds (on whom funds rely for their broader CGT reporting) have indicated that significant upgrades may be necessary to their tax reporting and underlying IT systems to accommodate the relief. The main challenges here are:

  • The need to undertake an analysis of all CGT assets at a parcel level, to identify which assets are eligible for the relief (i.e. held throughout the pre-commencement period), and then also to determine for which assets the relief should be chosen. This is not a straightforward exercise due to the differing unrealised CGT profiles, comprising assets in long gain, short gain and loss positions; and
  • The need to tag specific deferred gain amounts to assets on a parcel-by-parcel basis, such that when they ultimately are disposed of, the deferred gain is properly brought to account for tax purposes (along with the subsequent actual capital gain or loss based on the reset cost base).”

In other words, at the same time as the Government was confirming in the 9 May Budget an industry funding model for the major financial services regulators, it is clear that some elements of the industry are having to dig even deeper to cover the cost of implementing the CGT relief regime.

Much attention in the immediate post-Budget environment has been directed towards the levy imposed on the major banks, but there would appear to be considerably greater implications for the banks flowing from the Treasurer, Scott Morrison’s other Budget night announcement of a “Banking Executive Accountability Regime”, which will see all senior executives required to be registered with the Australian Prudential Regulation Authority (APRA) and open to deregistration, disqualification and the stripping of bonuses if they are found to be guilty of misconduct.

While the banks and their representative body, the Australian Bankers’ Association (ABA) chose to focus on the balance sheet issues associated with the six basis point levy, it is the Banking Executive Accountability regime which will carry with it longer term implications because it will serve to significantly alter the attractiveness of senior executive employment in the banking industry.

Many high-flying executives may prefer employment in the insurance and funds management sectors to avoid being found guilty of a breach and having their bonuses stripped together with facing deregistration and disqualification.




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