A couple of weeks ago, an Agent form the Australian Taxation Office (ATO) contacted us for feedback on their new strategy to have inactive superannuation balances paid to the ATO. They plan to enact this strategy as of 1 July 2019.
This initiative will enforce superannuation fund administrators to report and pay inactive, low balance superannuation accounts to the ATO. The ATO will then consolidate the unclaimed superannuation money into an active superannuation fund for the individual, without the individual requesting it.
Since the announcement of this initiative, we and many other financial advisers across Australia have held reservations and concerns in relation to this new initiative.
When the ATO contacted us to discuss their proposed process to enact this strategy, we welcomed the discussion with open arms.
We started the conversation by clarifying what the ATO “defined” as inactive superannuation. The ATO Representative Agent confirmed the following criteria meets their definition of an “inactive superannuation fund”:
Closing a superannuation account due to nil contributions over a 13-months period is ludicrous. We expressed these concerns among others.
We then proceeded to discuss the draft correspondence the ATO plan to use to notify the individuals of the super consolidation.
The ATO’s draft correspondence consisted of a letter to be physically posted, an email redirecting you to your myGov account to then open a copy of the letter physically mailed to you and a text-message which again, was very vague.
Although mildly impressed the ATO considered three avenues of contact, we were very unimpressed with the content. Without repeating the exact wording, the correspondence essentially said:
We have found your unclaimed superannuation money and have consolidated this for you.
That’s it. We therefore had a multitude of concerns surrounding this.
Assume the ATO continue with their current correspondence and process and don’t take any of our suggestions into consideration.
Say a person established a superannuation account in 2015. The superannuation account is not being used to receive current contributions but has been retained to fund insurance premiums for insurance cover in the fund. The person had no pre-existing conditions and therefore had no loadings or exclusions on the super funded insurance policies.
The person experienced a medical event in 2018 which disallows them from taking out any new insurance cover without exclusions.
It’s 1 July 2019 and the ATO has closed this superannuation fund and consolidated it with another “active” fund. The ATO issue a notification after enforcing the consolidation.
The person suffers from a medical event and would meet a claimable definition for their insurance products held in their superannuation account, opened in 2015.
The person is unable to make an insurance claim because the ATO has consolidated their “inactive” superannuation fund into their “active” superannuation fund.
The above suggested initial and subsequent correspondence to be provided to all recipients rectify 1-3 of our concerns surrounding their draft correspondence.
When pressing to understand how the ATO plan to choose the best superannuation fund to consolidate a person’s superannuation into, to ensure they are acting in the persons best interest, they were unsure of this process. They asked us how we would choose.
Well, its not simple.
Before making a consolidation recommendation, we would compare the following across all superannuation funds held:
The above comparison has to be taken into consideration in accordance to the members personal circumstance.
In order to make our recommendation to a client, we would need to prepare a Statement of Advice, detailing our findings and include our recommendations along with reasoning and consideration of advantages, disadvantages and alternatives considered.
We go through this process because we act in the best interest of our clients and we’re legally obligated to document our recommendations in a certain format.
If the ATO enact this consolidation initiative without consideration of the members personal circumstances, it is incredibly concerning.
Whether or not they take on any of our suggestions is yet to be determined.