The Financial Services Council has called for the government to use its budget to help rid the finance sector of old, substandard legacy products, which it estimates is costing almost 2.5 million consumers.
The FSC asked the government in its pre-budget submission to commit to policy that will slash obstacles to the rationalisation of legacy products.
Also on the industry body’s agenda is tax reform around the Asia Region Funds Passport, outstanding issues with the Investment Manager Regime (IMR), the removal of the capital gains tax (CGT), tax treaties in free trade agreements and the lowering of corporate tax.
FSC CEO Sally Loane said many of her body’s members have legacy products across managed investment schemes, life insurance and superannuation.
“The FSC has estimated there are at least 600 legacy structures, each of which may contain multiple products, disadvantaging an estimated 2.44 million consumers,” she said.
“Our members have modernised their products over time, but customers with older products cannot easily be transferred into newer products.”
Ms Loane said the FSC in its submission had provided solutions for barriers including significant tax liabilities triggered by shutting down legacy products and a ‘better off’ tests she said is “complex and expensive to apply”.
Issues with legacy products had been highlighted in both the royal commission and in the productivity commission’s inquiry into superannuation, with the later estimating around $160 billion in superannuation assets alone were in legacy products in 2017.
Product rationalisation was a recommendation of the financial services inquiry in 2014, which the government accepted.
“Consumers should not be worse off due to any transition to a newer product and will most likely be substantially better off in modern products with lower fees, better customer service, and improved accessibility,” Ms Loane said.
“The FSC believes a rationalisation scheme should involve a test to ensure a rollover is in the interest of consumers as a whole, and removal of any taxes on the rollover.”
In its budget submission, the FSC is also calling for the government to implement a zero rate of non-resident withholding tax on Asia Region Funds Passport payments.
“The Funds Passport allows eligible managed funds to be marketed to retail investors in participating countries, however tax reform needs to take place to maximise its potential,” Ms Loane said.
“The Australian tax regime for managed funds is complicated, with high tax rates and many exemptions – creating the impression our funds are highly taxed even though a very small amount of revenue is raised from the funds.
“Addressing our complex, uncompetitive tax system will enable the Passport to promote the exports of Australian funds.”
The FSC has also asked the government to prioritise existing commitments to address outstanding Investment Manager Regime issues, extend the attribution regime to Investor Directed Portfolio Services, and work on the Taxation of Financial Arrangements.
Also mentioned in the submission is the government’s proposal to remove the capital gains tax discount at fund level, with the FSC suggesting replacing it with a measure targeted at investors inappropriately accessing it.
The body added that the government should negotiate a tax treaty with Luxembourg and Hong Kong, address any financial services issues in existing tax treaties and ensure that all new Free Trade Agreements are accompanied by a tax treaty.
It has also said the government should pursue a cut in the overall corporate tax rate to 25 per cent, preferably to 22 per cent.
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