The final report of the Murray Financial System Inquiry was released on Sun 7.12.2014. The Inquiry made 44 recommendations relating to the Australian financial system. The Inquiry identified 2 general themes where there is significant scope to improve the functioning of the financial system: 1. Funding the Australian economy; and 2. Competition.
The Inquiry identified a number of distortions that impede the efficient market allocation of financial resources, including taxation, information imbalances and unnecessary regulation.
TAXATION ISSUES: Reducing the distortionary effects of taxation should lead the system to allocate savings (including foreign savings) more efficiently and price risk more accurately. The Inquiry has referred the identified tax issues for consideration in the Tax White Paper.
TAXATION ISSUES REFERRED FOR ‘WHITE PAPER’: Tax issues referred by the Inquiry for consideration in the Tax White Paper include:
- In reviewing the taxation of contributions and investment earnings in superannuation, the Tax White Paper should consider aligning the earnings tax rate across the accumulation and retirement phases.
- Tax concessions in the superannuation system are not well targeted to achieve provision of retirement incomes.
- The relatively unfavourable tax treatment of deposits and fixed-income securities makes them less attractive as forms of saving and increases the cost of this type of funding.
- Capital gains tax concessions for assets held longer than a year provide incentives to invest in assets for which anticipated capital gains are a larger component of returns. Reducing these concessions [the 50% discount] would lead to a more efficient allocation of funding in the economy.
- The case for retaining dividend imputation is less clear than in the past. To the extent that dividend imputation distorts the allocation of funding, a lower company tax rate would likely reduce such distortions.
- For non-residents, repatriated income from Australian investments is, in some cases, subject to withholding tax. The unequal tax treatment of repatriated income may affect the funding decisions of Australian entities and place Australia at a competitive disadvantage internationally. Lower, more uniform withholding tax rates would unwind these distortions.
- Simplifying the tax rules for VCLPs (Venture Capital Limited Partnerships) and streamlining Government administration of the regime would reduce barriers to fundraising.
- GST is not levied on most financial services. This may contribute to the financial system being larger than it otherwise would be.
SUPERANNUATION ISSUES: The Inquiry’s recommendations include the following:
- Remove the exception to the general prohibition on direct borrowing for limited recourse borrowing arrangements by superannuation funds.
- Require superannuation trustees to pre-select a comprehensive income product for members’ retirement. The product would commence on the member’s instruction, or the member may choose to take their benefits in another way. Impediments to product development should be removed.
- Provide all employees with the ability to choose the fund into which their Superannuation Guarantee contributions are paid.
- Raise the competency of financial advice providers and introduce an enhanced register of advisers.
- Create a new Financial Regulator Assessment Board to advise Government annually on how financial regulators have implemented their mandates.
- Rename “general advice” and require advisers and mortgage brokers to disclose ownership structures.
CONSULTATION and COMMENTS: The Treasurer said the Government intends to consult with industry and consumers before making any decisions on the recommendations. Written submissions are being sought from all stakeholders, including industry and members of the public. As a number of recommendations are the responsibility of the financial regulators – APRA, ASIC and the RBA – those submissions will be made available to these agencies unless the submitter indicates otherwise.
Comments close on 31 March 2015 and should be sent to: Senior Adviser, Financial System and Services Division, The Treasury, Langton Crescent, PARKES ACT 2600; Email: fsi@treasury.gov.au. For enquiries, please call David Crawford on (02) 6263 2757.
[LTN 237, 8/12/14]