Refining the financial services reforms

In its pre-Budget submission to the Federal Government, the Financial Planning Association called on the Government to implement a range of initiatives to support the current wave of regulatory reforms. Dante De Gori provides an overview of the association’s key recommendations.

This time last year the Henry Tax Review occupied most headlines and was one of the most anticipated responses by the Government for some time.

The release of, and the response to, the Review proved to be controversial for many reasons – not only for the mining tax, but also for the recommendations that were not adopted by the Government.

‘A Tax Plan for our Future’ contained superannuation changes that subsequently occupied the Federal Budget for 2010, and have since been placed under threat due to the reliance on the mining tax.

So 12 months later, what can we expect from the Federal Budget in 2011? What is certain is that controversial measures in the flood levy and carbon tax will undoubtedly occupy the headlines – but what about superannuation and other tax measures?

In the Financial Planning Association's (FPA's) submission to Treasury, its recommendations concentrated on key budgetary public policy, designed to assist the Government achieve the following three key principles:

• Improve access to financial advice for those Australians who are most in need of assistance in managing their financial affairs;
• Encouraging a savings culture and improve Australians’ retirement preparedness to reduce reliance on the social security system; and
• Removing inconsistencies in the tax system.

The FPA has long acknowledged and supported the Government’s efforts in addressing these issues, through numerous reviews and inquiries: the Future of Australia’s Tax System (the Henry Review), the Review of the Governance, Efficiency, Structure and Operation of Australia’s Superannuation System (the Cooper Review), and the Future of Financial Advice reforms (the Government’s response to the Parliamentary Joint Committee on Corporations and Financial Services’ Inquiry into financial products and services in Australia).

However, to achieve these objectives there must be budgetary initiatives to support the regulatory reform commitments the Federal Government has undertaken to improve Australia’s superannuation, tax and financial services systems.

The 2011 Federal Budget provides the ideal timing to introduce the necessary budgetary policy initiatives needed to complete the reform packages to achieve these objectives.

Access to advice is a part of the Future of Financial Advice (FOFA) reforms, however it is only dealing with regulatory impediments and extending intra-fund advice is not the solution.

A key consideration in improving access to advice (that is not currently muted by Treasury) is public policy initiatives to help consumers to pay for advice.

The question is how to keep financial advice within the reach of the community and not create further financial exclusions. You cannot create access to advice without consideration of how Australians are going to pay for it.

The Australian Securities and Investments Commission recognises that “one of the most significant challenges associated with trying to improve access to advice is the very real gap that exists between what consumers are prepared to pay for advice and what it costs the industry to provide advice”.

The cost of advice is one of the biggest barriers to access to advice for consumers with “no easy fix to this issue”.

A long-standing policy of the FPA has been the need to consider the ability of Australians to pay for all types of financial planning advice. Currently, a fee-for-service arrangement for the preparation of an initial financial plan is not tax deductible.

The inability to claim a tax deduction for the fees associated with an initial financial plan acts as a disincentive for people to take the first step towards organising their finances on a strategic basis.

This has widespread costs, both for the individuals and the community as a whole. Encouraging the use of professional financial planning advice results in a more financially literate community, which is a benefit to society overall.

In addition to tax deductibility of financial advice, the following payment options should also be considered to help Australians pay for professional financial advice:

• Government subsidies to low-income families for financial advice fees;
• Using salary sacrifice arrangements to pay for advice; and
• Accessing the Government superannuation co-contribution scheme to pay for financial advice on superannuation matters.

The FPA also recommended ways to concentrate on encouraging a savings culture and removing inconsistencies in the tax system, such as:

• Providing incentives to encourage people to defer the age pension by allowing individuals who are still working to contribute to super beyond the age of 75;
• Extending the drawdown relief for account-based pensions into 2011-2012; and
• Simplifying the tax treatment of death benefits with more consistent definitions of ‘dependant’ for tax and superannuation purposes.

One of the more controversial policy decisions by this Government was to halve the concessional caps to $50,000 for people aged 50 and over, and to halve them again to $25,000 from 1 July 2012.

However, it is the 46.5 per cent excess contributions tax penalty for breaching the non-concessional cap, and the inability to amend or correct it when made in error, that is the greater injustice.

As a result this policy actually works contrary to the three key principles mentioned at the beginning of this article and therefore provides the following options:

• Amend legislation to remove the 46.5 per cent penalty rate that applies when the non-concessional contribution cap has been breached. Instead provide the following process:
  • Refund excess non-concessional contributions back to the taxpayer;
  • Provide taxpayer with warning and impose no monetary penalty if it is the taxpayer’s first ever breach of the non-concessional contribution cap; and
  • Impose a monetary penalty (admin fee/charge) on the taxpayer if it is their second or third breach of the non-concessional contribution cap;
• Increase the superannuation concessional contribution cap to $100,000 for those 50 years and over (with superannuation balances of $500,000 or less); and
• Remove superannuation guarantee (SG) contributions from being counted towards the concessional contribution cap.

We call on the Government to adopt the above recommendations, since we believe that they would effectively deliver good social outcomes by improving the long-term financial security of Australians.

Dante De Gori is the FPA’s general manager for Policy and Government Relations.