Jenny McAllister (NSW, Australian Labor Party, Shadow Cabinet Secretary) Share this | Link to this | Hansard source

I rise to speak to the Treasury Laws Amendment (2019 Measures No. 3) Bill 2019. Labor will be supporting this bill. There are three schedules to the bill and in turn these address matters relating to testamentary trusts, deferral of education and training standards for existing advisers and making miscellaneous amendments as part of the routine process of updating provisions and correcting errors.

Schedule 1 to the bill implements a 2018-19 budget measure and closes a loophole that allows testamentary trusts of deceased estates to be used for tax evasion purposes. It is designed to ensure the tax concessions available to minors in relation to income from a testamentary trust only apply in respect of income generated from assets of the deceased estate that are transferred to the testamentary trust or the proceeds of the disposal or investment of those assets. In effect, the law as it stands means that testamentary trusts can be used as a vehicle to minimise tax because income other than that resulting from a diseased estate can be transferred into them. Under present circumstances, the income minors receive from testamentary trusts is taxed at adult marginal rates, which access the $18,200 tax-free threshold. Some taxpayers, therefore, are able to appropriately obtain the benefits of this lower tax rate by injecting assets unrelated to the deceased estate into the testamentary trust. The government wants to close the loophole, and we fully support it.

The effect of schedule 1 is that income from testamentary trusts will be limited to income derived from the assets that are transferred from deceased estates or the proceeds of the disposal or the investment of those assets, and this is appropriate. But nobody should be under any illusion that this is a substantial reform. As the 2018-19 budget said, 'The measure was estimated to have a small, unquantifiable gain to revenue over the forward estimates period.' We shouldn't count on this measure to direct rivers of gold into the Treasury any time soon. And if the government wants to be taken seriously, and this is a very big if, then it should bring serious proposals in relation to tax avoidance into this chamber.

Schedule 2 to the bill amends the Corporations Act to defer the transitional time frames for existing providers to comply with the education and training standards, requiring completion of an approved degree or equivalent qualification and the standard requiring the passing of an approved exam. The transitional time frame for the approved degree or equivalent qualification will be deferred by two years to 1 January 2026. The transitional time frame for the approved exam will be deferred by one year to 1 January 2022. These are unfortunate but necessary amendments. They arise from the government's mishandling of the professional standards for financial adviser reforms.

In March 2017 reforms were introduced into the Corporations Act by the Corporations Amendment (Professional Standards of Financial Advisers) Act to raise the education, training and ethical standards of financial advisers. These reforms passed the parliament with bipartisan support over three years ago. They set new standards for financial advisers. They were intended to progressively come into effect from 1 January 2019. However, the body appointed by the government, the Financial Adviser Standards and Ethics Authority, was extremely slow to set the standards. As a result, financial advisers have been placed in the very difficult position of being asked to comply with the standards and complete exams at incredibly short notice. The government's decision to defer the educational and exam requirements is now appropriate but it should have been entirely unnecessary. It is only the result, and exclusively the result, of the implementation failures of the government.

Regrettably, we are in a position where we support a deferral to the deadlines. We understand that it is necessary. But when the parliament passes legislation it has every expectation that it will be implemented by the executive within the time frames in the legislation. It is a terrible failing by this government, a failure that has placed impossible pressures on financial advisers to comply with the new standards and sees the Senate placed in this position.

Schedule 3 of the bill makes a number of minor and technical amendments to laws relating to taxation, superannuation, corporations and credit. These amendments correct typographical and numbering errors. They bring provisions into line with modern drafting conventions, they repeal inoperative divisions, they remove administrative inefficiencies, they address unintended outcomes and they update references. Essentially, they help Treasury laws improve to operate as intended. And they were recommended by the 2008 Tax Design Review Panel.

This legislation contains necessary changes. It implements a long delayed budget measure to close a small tax loophole. It defers a previously legislated time frame that has not been met and it makes minor revisions to various laws through a process recommended by the 2008 Tax Design Review Panel. All these things are necessary. Some of these things could have been avoided.

We will always support sensible legislation that assures the efficient and effective operation of our taxation, financial services and corporate law systems, but the changes made in this bill should have been made much sooner. We condemn the government for its tardiness, it lack of attention and its failures in implementation.

Before I conclude, I wish to advise the chamber about the amendments that Labor circulated to this bill in May. I inform the chamber that Labor will now withdraw these amendments on sheet 8891 and we will not be moving them in the committee of the whole.

In the House of Representatives, Labor proposed amendments to this bill to remove the legislative exemption from conflicted remuneration rules for financial advisers in relation to the selling of units or shares in listed investment trusts and listed investment companies. Labor first introduced a ban on conflicted remuneration in 2012. But in 2014 this government introduced a loophole for listed investment vehicles and that enabled billions of dollars' worth of shares in units to be sold on the basis of commissions, costing mum and dad investors millions. As the shadow minister for financial services, Mr Jones, has said, ordinary investors were left exposed to complex, opaque and underperforming products because of this dud legislation.

Labor has been putting pressure on the government to remove this loophole for nearly a year. We have proposed moving these same amendments in the Senate, but we acknowledge that the Treasurer has finally come to the table. The Treasurer has committed to remove the conflicted remuneration exemptions for listed investment and listed investment trusts. Last week, he issued draft regulations to that effect for consultation. So today we are withdrawing our amendments in good faith. But if the final regulations are not up to scratch, are not issued in a timely manner or don't adequately protect ordinary Australian investors then we will be returning to the parliament to address this issue again.

Labor gives credit to the government for acting on this important issue, but this is a commonsense decision and it should have been arrived at far earlier. I thank the Senate.

Rex Patrick (SA, Centre Alliance) Share this | Link to this | Hansard source

I rise to speak in support of the Treasury Laws Amendment (2019 Measures No. 3) Bill 2019. Centre Alliance fully supports the provisions in the bill. I won't repeat the purpose of the bill—Senator McAllister has done a fantastic job articulating what the bill seeks to achieve. However, I will be moving an amendment in the committee stage and I just want to talk about that amendment now.

My amendment will rid the Federal Register of Legislation of a perverse provision in the Corporations Act which exempts some large proprietary companies from having to lodge financial reports. That includes financial statements and directors' declarations to ASIC. This is highly problematic for a couple of reasons. Firstly, it inappropriately leaves in place an elite or privileged class of companies that do not have to lodge ASIC reports. If my amendment passes then that inequity will no longer continue. We cannot have a legislative privilege in Australia—in an Australia which does not take kindly to these sorts of privileges.

Secondly, the opaqueness created by not filing accounts with ASIC creates an environment that may well encourage the aggressive tax minimisation behaviour that the government says it is trying to combat. I would also add that when an entity wants to have dealings with a company, one of the things they do is go to ASIC and seek information about the company which may help them to make decisions about whether or not they want to trade or deal with that particular company. That is not possible for these companies.

The exempt proprietary company list was created in 1995 as a temporary measure.

Peter Whish-Wilson (Tasmania, Australian Greens) Share this | Link to this | Hansard source

It was Paul Keating.

Rex Patrick (SA, Centre Alliance) Share this | Link to this | Hansard source

Okay—it was Paul Keating. That's correct, Senator Whish-Wilson. At the time there were more than 1,500 companies that were on the list. When the bill passed through the Senate in 1995, the then Senator Michael Baume, AO—a Liberal senator—moved an amendment, and I'll read the amendment:

At the end of the motion, add:

"and the Senate resolves that not later than two years and six months after the commencement of the amendments set out in items 1 to 6 of Schedule 4 of the bill, the Australian Securities Commission is to cause to be laid on the table a review of the first two years of the operation of those amendments".

Do you know what? So far as I can tell that review never took place, despite the Senate commanding that it should. I asked at estimates whether or not ASIC could find evidence of a review, and nothing came back in relation to that. So we can comfortably assume that the review did not take place.

The Senate Economics Committee conducted an inquiry into multinational tax avoidance across both the 44th and 45th Parliaments. One of the submissions it received, submission No. 32, was from ASIC, who raised the concern about these exempted companies. That led the Senate economics committee to ultimately recommend:

… that the government require all companies, trusts and other financial entities with income above a certain amount to lodge general purpose financial statements with the Australian Securities and Investments Commission.

My amendment will implement the recommendation—which was, in effect, initiated by ASIC—that was made to the Senate.

There is no reasonable excuse—I repeat: there is no reasonable excuse—for the coalition not supporting this amendment. I put the question to the minister in the last estimates about the government's response to this Senate report, and—noting it was a 2015 report—I got the answer: 'The government is still considering its response to the Corporate tax avoidance, Part III, Much heat, little light so far report. The government will respond in due course'. I'm sorry; that is not good enough.

In practical terms, my amendment removes the special status of these exempt companies. Currently, there are 1,119 exempt companies, owned by some very familiar names—names that the Liberal Party will know very, very well. They will have to lodge financial reports with ASIC going forward. They'll be subject to the same scrutiny as everybody else. Colloquially, the current situation doesn't pass the pub test, and, indeed, this elitism would be banned from even entering the pub.

Catryna Bilyk (Tasmania, Australian Labor Party) Share this | Link to this | Hansard source

The Treasury Laws Amendment (2019 Measures No. 3) Bill 2019 is an omnibus bill that makes a number of minor changes relating to taxation, superannuation, corporations and credit. One of the key provisions in the bill is to change the tax concessions available to minors from a testimony trust.

The measure in the bill I would like to focus my attention on in this second reading speech is an amendment to the Corporations Act which defers the education and training standards for existing financial advisers. The transitional time frames for an approved degree or equivalent qualification will be deferred by two years to 1 January 2026, and the transitional time frame for the passing of an approved exam will be deferred by one year to 1 January 2022. In a nutshell, this is the deferral of the implementation of the Financial Adviser Standards and Ethics Authority, or FASEA, reforms. Labor has offered bipartisan support for these reforms, and we also support this amendment, but the deferral of the FASEA reforms is only necessary because of the absolute shambles this government has made of them. It's almost 11 years since the parliamentary inquiry into financial products and services handed down its report, eight years since the Future of Financial Advice, or FOFA reforms, five years since the government's announcement of the FASEA reforms, three years since the establishment of the authority, and 18 months since the new requirements commenced. The government has had plenty of time to get this right, yet their revolving door of leaders, finance ministers, treasurers and assistant treasurers hasn't helped the process. Neither has FASEA going through three different CEOs in the first 18 months.

The incompetence and failures in the implementation of these reforms have led to ongoing delays, which have had a detrimental impact on both financial advisors and their customers. For customers, it means that they remain at the mercy of those few financial advisers who are acting unethically and failing to represent their clients' interests first. For financial advisers, the overwhelming majority of whom are acting professionally and ethically, it has led to frustration and uncertainty about their future in the profession.

There has been a lack of consultation around the reforms and the feedback that has been received has resulted in barely any changes. Professional standards were released only days before they were due to come into effect. We heard in the House of Representatives second reading debate on this bill of concerns raised by some financial advisers that almost every financial adviser in Australia would be in breach of the standards because of FASEA's delay in releasing their final guidance. Remember that it was as late as mid-October last year when the Treasurer announced in a media release that a code of ethics would be released and all financial advisers would be required to adhere to it by 1 January 2020. It was even later—mid-November—when the Australian Securities and Investments Commission assured advisers that they would not be in breach of the law because they were unable to register with an ASIC-approved compliance scheme by 1 January 2020.

In recent months much of the anger and frustration has arisen from the exam that financial advisers have been required to pass by January 2021. I've had numerous representations in my office about this issue. Six months of exam preparation time was lost to financial advisers because of the delays in FASEA releasing exam guidance. When the guidance was finally released, it was very vague and gave limited information to financial advisers about what topics would be examined and how they should prepare for the exam. The first exam was held entirely in metropolitan areas, which made it difficult for many advisers to attend.

One of the key problems that have been raised with me by financial advisers in relation to the exam is the lack of feedback on exam performance. This is particularly frustrating for those advisers who have failed and need to study again to re-sit the exam. The exam covers three domains of knowledge—specifically: financial advice regulatory and legal obligations; applied ethical and professional reasoning and communication; and financial advice construction. For candidates who have failed an exam, the statement of results highlights the broad domain knowledge areas they need to focus on. This high-level feedback is very unhelpful in helping candidates know what topics they need to study. Of the 470 advisers who sat the April exam, around 16 or 17 per cent were sitting it for the second time, according to a report by the publication Professional Planner. Only 50 per cent of those advisers sitting the exam for the second time passed. For those advisers who have failed the exam twice it must be incredibly frustrating not only to have to sit the exam a third time but to be given almost no clues as to why they have failed.

I'll give you an idea of why they are so frustrated. It costs close to $600 to sit the exam each time and sittings are available only every two to three months. To add further uncertainty, it takes around six to eight weeks after the exam to get the results. This means that a financial adviser who has failed twice may have spent around six months trying to pass the exam, paid $1,200 in sitting fees and taken many hours out from doing work for their clients to prepare for the exam. After all that, they've got nothing to show for it. They still have no guarantee that investing time in further study will allow them to keep working in their industry—an industry that some have been in for decades. It's hard to imagine the anxiety that some financial advisers must be experiencing when they have a black cloud like this hanging over their future in their profession and no clear answers about what they need to do to clear it up.

For an industry which in the past has faced a number of scandals involving conflicted remuneration, from which many Australians have suffered, it's not unreasonable to require that its practitioners adhere to professional standards. It brings financial planning into line with a number of professions with similar requirements—medical practitioners, lawyers and accountants, to name a few. I say it's not unreasonable, but the Morrison government have made the requirements unreasonable through their poor handling of this reform. They have expected financial advisers to pass an exam in an environment where the standards and exam guidance were released late, the exam guidance and feedback are vague, and the first exam sittings were difficult to access. They have, once again, completely bungled what should have been a straightforward reform.

Labor has amendments to this bill that will remove the exemption from conflicted remuneration rules for financial advisers in relation to selling of units or shares in listed investment trusts and listed investment companies. This exemption was part of the Liberals' winding back of Labor's FOFA reforms. Since 2015 the market for listed investment companies and listed investment trusts has doubled to $45 billion, yet these products have performed very poorly, with an average return since 2015 of minus 6.1 per cent. There is absolutely no reason to keep the exemptions for LICs and LITs, and ASIC agrees. ASIC supported Labor's position when they told TheAustralian Financial Review almost one year ago:

Conflicted remuneration in financial services should be prohibited or removed as a general policy.

The banking royal commission also recommended considering the remaining exemptions to the ban on conflicted remunerations and whether each one remains justified. I can't see how the exemption for LICs and LITs remains justified when they are underperforming and advisers are earning commissions of between one and three per cent on them. The winding back by those opposite of Labor's FOFA reforms was a backwards step and one for which investors continue to suffer by being encouraged to invest against their own interests in high-risk and poorly-performing products. I'm disappointed that the government has chosen to play politics with Labor's amendment sand to blame our amendments on its own decisions to delay this bill.

In an 11 May article in Professional Planner Senator Hume described our amendments as a backflip and as having been moved at the eleventh hour. It is neither, and those opposite know it and should stop misleading the industry. Yes, the amendments were redrawn in the House and, yes, they were reintroduced in the Senate, but since the amendments were first moved in February we have made it abundantly clear to the government that they will remain on the agenda. I'll happily agree with the government that industry has a right to be angry about this delay, but any anger it expresses should be directed squarely at government. Given the anger that's already been directed at the government by the financial services industry for their mismanagement of the FASEA reforms, it is of little surprise that the government have tried to deflect some of the anger towards us, even if they had to reinvent history to do so.

Rather than play political games, the government should be directing their energy towards giving the industry certainty. I'm sure a competent government would be capable of making improvements to the exam process that satisfactorily addresses the concerns of the industry without diminishing the quality of ethical standards that the exam is designed to uphold. When this bill passes, those opposite need to own up to their mistakes and dedicate the additional time parliament has given them to getting this reform right. This will need further discussions with financial advisers to understand the concerns they have and the barriers they are facing in completing and passing the exam.

What we are not hearing from this government in its contributions on this bill or any other public forum is an apology to all those financial advisers who've been thrown into turmoil by its mishandling of these reforms. No-one in the government has the honesty or the guts to fess up and say, 'Yes, we stuffed this up; we got it wrong and we're sorry.' The extension provided by this bill is a tactical admission of the monumental mess the Morrison government has made of these reforms. If they are going to admit by their deeds that they got this so badly wrong, why not have the courage to follow that with an admission in words as well. How can financial advisers and their clients have any faith that those opposite are truly committed to fixing this mess if they can't admit to making the mess in the first place? This is the Liberal Party, the party which claims to encourage enterprise, which claims to stand up for and look after small business, yet it has failed thousands of small businesses in this sector so dismally. This is supposedly the party that is so committed to deregulation and to reducing red tape, for which we had to sit and listen to lectures on regulation when it introduced its ridiculous omnibus repeal bill. We listened to lectures on red tape while they introduced bills which removed out-of-date legislation and corrected punctuation delivering absolutely zero benefit for business. This massive debacle and the distress it caused financial advisers clearly shows that the Liberal small business advocacy and red tape reduction credentials are non-existent.

Of course, the absolute mess they've made of an important reform for the financial services sector adds to a ton of evidence against the ridiculous myth that those opposite are superior economic managers. Given their recent $60 billion JobKeeper blunder, the robodebt debacle and the sports rorts scandal, I'm surprised that any Australian would trust them to run a chook raffle, let alone the country. But, hopefully, with another year's grace, the government will have enough time to clean up the mess they've made of FASEA. Let's hope these reforms can still be salvaged, because, when it comes to accountability in the financial services sector, Australians have very little faith in the government that voted 26 times against the banking royal commission and dragged its feet for years on payday lending.

Labor remains 100 per cent behind the establishment of FASEA and the requirements for financial advisers to meet educational standards, to pass a professional exam, to have professional experience and to meet continuing professional development requirements. We know from evidence given to the banking royal commission and other previous inquiries that, sadly, a minority of financial advisers put their own interests ahead of those of their clients, and we also know that investors suffer as a result. But it is important to acknowledge that the majority of financial advisers do act with high ethical standards and look after the interests of their clients.

The incompetent hand that this government has made of the implementation of the FASEA reforms has two groups of victims: financial advisers who do the right thing, who act ethically and who look after their clients; and the customers of those financial advisers who don't. So I hope, for the sake of all those affected, that, with the passage of this bill, the Morrison government can fix their mistakes and get this reform right. I commend the bill to the Senate, and I urge the government and the crossbench to make sure this bill goes through.

Jane Hume (Victoria, Liberal Party, Assistant Minister for Superannuation, Financial Services and Financial Technology) Share this | Link to this | Hansard source

First I would like to thank those senators who have contributed to this debate. This bill contains a number of measures which improve the integrity of the tax system, provide flexibility in completing new financial adviser requirements and ensure existing legislation operates as intended.

Schedule 1 amends the Income Tax Assessment Act 1936 to limit the tax concessions available to minors in relation to income from a testamentary trust in respect of income derived from assets transferred from the deceased estate or subsequently accumulated from those assets. This is an integrity measure to improve the taxation of testamentary trusts. It was announced in the 2018-19 budget and applies from 1 July 2019.

Schedule 2 extends transitional deadlines for existing advisers to ensure that they have enough time to meet new professional requirements. Existing advisers will be required to complete the exam set by the Financial Adviser Standards and Ethics Authority by 1 January 2022; this is one additional year. In addition, advisers will be required to meet the qualification requirements by 1 January 2026; this is two additional years. The government is committed to raising education and training standards of financial advisers. This includes new entrants and existing advisers.

Schedule 3 makes minor technical and machinery amendments to the Treasury portfolio legislation. This includes amendments to address technical deficiencies, to ensure the law operates as intended in the Treasury portfolio legislation and to remove administrative inefficiencies. I commend this bill to the Senate.

Question agreed to.

Bill read a second time.