Draft 179: superannuation account identifier. An AIST discussion paper. An AIST Discussion Paper. Page 1

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1 Draft 179: THE Superannuation SILVER BULLET? Plans and Using Approved Tax File Deposit Numbers as Funds the primary superannuation account identifier An AIST discussion paper An AIST Discussion Paper A January 2011 Page 1

2 Table of Contents An AIST Discussion Paper... 1 January Introduction... 3 About AIST... 4 Summary of AIST recommendations... 4 Tax File Numbers... 5 History of TFNs... 5 Derivation of TFNs... 5 TFN Privacy Guidelines... 6 Superannuation and Tax File Numbers background... 7 Superannuation and Tax File Numbers current use... 8 Real time online TFN verification... 9 TFN compromise The Cooper Review and TFNs Government response to the Cooper Review recommendation on TFNs Consolidation of multiple accounts Next steps Page 2

3 Introduction The Federal Government s decision in December 2010 to allow super funds to use Tax File Numbers (TFN s) as the primary superannuation account identifier is a deceptively simple reform that brings real benefits to superannuation members, and will change for the better the way the superannuation system operates. The use of TFNs in this way will simplify administration, reduce costs, make it easier for members to engage with their super fund, and reduce the incidence of lost super. There are privacy concerns associated with an expanded use of TFNs; however, the Government has already confirmed these can and will be addressed by continuing the voluntary quotation of TFNs and their use with members consent. The Federal Government s decision was made in response to recommendations in the report of the Super System Review, better known as the Cooper Review. The use of TFNs as primary identifiers was widely supported in submissions made to the Cooper Review, and has been favourably commented on following the release of the report. However, this is not a new idea, and ever since TFNs started being used for some superannuation purposes in 1997 there have been proposals to extend their use some of which have been implemented. Like most in the superannuation industry, AIST strongly supports the use of TFNs as the primary identifier. We have prepared this paper in order to assist our members in understanding TFNs, how they have been used, the issues associated with their use, and ways of facilitating the implementation of the Government s recently announced reforms. AIST also makes a series of recommendations in this report, each aimed at supporting implementation of the reforms. Managing privacy issues, properly resourcing the ATO, providing real time online TFN verification, and carefully preparing for further account consolidation are the key issues covered by this report. AIST believes maximum benefit will be given to the Cooper recommendation on TFN confirmation through the use of an online real time TFN verification tool. The consolidation of superannuation accounts is a benefit for members who are not engaged with their super, but the implementation of consolidation arrangements needs to be carefully considered to ensure it does not result in any disadvantage to members who have made conscious decisions about their superannuation investments, insurance and associated services. Therefore, consolidation arrangements between super funds should operate on an opt-out basis for members of MySuper products, and on an opt-in basis for members of Choice products. As soon as the Government issues details of the regulatory framework for TFN implementation, AIST will be issuing a further report including a checklist for AIST members. This is a discussion paper for AIST members, and we invite your comments and suggestions. Please forward your comments and questions to AIST Project Director, David Haynes dhaynes@aist.asn.au Page 3

4 About AIST The Australian Institute of Superannuation Trustees is a national not-for-profit organisation whose mission is to promote and protect the interests of Australia's $450 billion not-for-profit superannuation sector. AIST's membership includes the trustee directors and staff of industry, corporate and public-sector funds, who manage the superannuation accounts of nearly two-thirds of the Australian workforce. As the principal advocate and peak representative body for the not-for-profit superannuation sector, AIST plays a key role in policy development and is a leading provider of research. AIST provides professional training, consulting services and support for trustees and fund staff to help them meet the challenges of managing superannuation funds and advancing the interests of their fund members. Each year, AIST hosts the Conference of Major Superannuation Funds (CMSF), in addition to numerous other industry conferences and events. Summary of AIST recommendations AIST supports the voluntary quotation principle for Tax File Numbers, and maintenance of this principle throughout the implementation of the Stronger Super reforms. AIST recommends that super funds review their privacy policies following any change to the allowable use of TFNs, and any associated changes to the TFN Privacy Guidelines. AIST recommends that the Cooper Review recommendation on TFN confirmation be implemented through the development of an online real time TFN verification tool. AIST recommends that the Government makes a specific and immediate commitment to funding ATO costs associated with: o The production of timely and accurate TFN reports for super funds; o Extending the use of an individual s TFN as the primary identifier of member accounts; and o The development of an online real time TFN verification tool. AIST recommends that, once established, the SuperStream subgroup be tasked with liaising with APRA and the superannuation industry to develop a set of guideline addressing consolidation between super funds. AIST recommends consolidation arrangements between super funds operate on an opt-out basis for members of MySuper funds, and on an opt-in basis for members of Choice funds (i.e. members who have any investment, insurance or other service arrangements beyond default levels). Page 4

5 Tax File Numbers A Tax File Number (TFN) is a unique eight or nine digit number issued to each taxpayer (whether individual, company, super fund or trust) by the Australian Taxation Office (ATO) for the purpose of assisting the ATO to administer tax and other government systems. TFNs allow the ATO to match a taxpayer s income from different sources. Your TFN is yours for life, even if you change jobs, move interstate or change your name. If you leave the country and come back to Australia, you still use the same TFN. (ATO website) Introduced in 1988, TFNs have been able to be used for some limited superannuation purposes since The permitted superannuation use of TFNs has expanded over time, and the Federal Government has now determined to allow TFNs to be the primary identifier of member accounts. The gradual increase in allowable uses for TFNs has given super funds and their administrators experience that will help in implementing the forthcoming changes, and will also help identify where issues may exist. History of TFNs TFNs were introduced in 1988 following the collapse of the Australia Card proposal for a national identification system. However, super funds were not initially permitted to seek or to hold their members TFNs. The principle purpose of TFNs was and is to assist the ATO to match individual income from different sources. In recognition of the political backlash against the Australia Card, TFNs were not allowed to be used as a national identification system. Since inception, there have been strict laws governing the use and disclosure of TFNs, primarily to protect individual privacy. There have been changes to TFN legislation allowing their use for additional identification and tax-related purposes; however, a constant feature of TFNs has been their voluntary use (although taxation at the top marginal rate or restricted access to Government benefits may occur when a TFN has not been provided). Derivation of TFNs TFNs are issued by the ATO to taxpayers and do not have any embedded meaning. Each TFN is generated by a mathematical formula or algorithm, so that numbers can be tested and invalid numbers can, in theory, be identified. The ATO provides the algorithm to anyone who has a business need for it and has provided it more than 20,000 times, including to many super funds. In any event, the Australian National Audit Office has said: Page 5

6 A competent mathematician provided with a handful of numbers could with relative ease derive the TFN check digit formula. (ANAO, Management of Tax File Numbers, 1999) You do not even need to be a mathematician anymore, as there are websites that provide the algorithm and a means to check numbers (e.g. Anecdotally, there are also backpackers hostels and the like where a list of valid TFNs is apparently pinned to a noticeboard supposedly so that a backpacker can pick a number to improve their employment opportunities. Therefore, while TFNs remain a unique identifier and must pass the TFN algorithm that alone does not provide a high level of confidence of itself that a TFN is valid. The key test is that it must belong to the taxpayer that quotes it. Even though the algorithm has lost some of the security value it may have once had, it still retains value and it would be administratively inconvenient to change for both individuals and the ATO. Furthermore, it provides a useful check against administrative errors, such as the wrong digit being inserted, or digit transposition. TFN Privacy Guidelines Legally binding TFN Guidelines govern the use of TFNs. These guidelines are issued by the Privacy Commissioner under the Privacy Act 1988, and breach of the guidelines may attract a penalty. The two general guidelines are as follows: 1.1 The tax file number is not to be used as a national identification system by whatever means. 1.2 The rights of individuals under taxation, assistance agency or superannuation law to choose not to quote a tax file number shall be respected. The terms of Guideline 1.2 are likely to remain inviolate. This forms the basis of the voluntary quotation principle, and the Privacy Commissioner has strongly expressed the view that no laws (including superannuation laws) should make the quotation of a TFN a requirement. The Privacy Commissioner will continue to insist on adherence to this Guideline in any changes to the allowable superannuation uses of TFNs. This includes continuing the prohibition on the ATO providing TFNs to super funds without members consent, except in exceptional circumstances. In the Privacy Commissioner s submission to the Cooper Review, it was stated: The Office would not be opposed to promoting efficiency in the superannuation system through limited and clearly articulated use of the TFN for the types of activities described. Such a proposal should be measured; accompanied by strict privacy safeguards to protect personal information and choice; and be based on the likelihood of strong individual benefits. (Paragraph 21; p6) Page 6

7 Superannuation funds are listed in the ATO s Classes of lawful TFN recipients, and also are attached to the guidelines, with the caveat that TFNs are to be used for the location and identification of member s benefits where other identification material is insufficient to do so. Following consultation with the Privacy Commissioner, the Government will no doubt remove the words following where from the TFN Privacy Guidelines. AIST supports a change to the Privacy Guidelines allowing TFNs to be used as a primary identifier. The Government s Stronger Super document echoes Guideline 1.2 where it states: A member s right not to quote a TFN will be respected. The Government s response to the Cooper Report supported the recommendation tasking Treasury with preparing a Privacy Impact Statement to help identify and assess any privacy impacts of SuperStream (Recommendation 9.10). The first task of this Treasury process should be to review the TFN Privacy Guidelines in consultation with the Privacy Commissioner. Every super fund has a privacy policy which includes, among other things, information about the fund s collection and use of TFNs. Some of these are quite specific while others use more general language or reference to relevant legislation. Privacy statements should be reviewed on a regular basis, but they should be specifically reviewed to ensure they properly and fully explain allowable uses of TFNs. AIST supports the voluntary quotation principle, and its maintenance throughout the implementation of the Stronger Super reforms. AIST recommends that super funds review their privacy policies following any change to the allowable use of TFNs, and any associated changes to the TFN Privacy Guidelines. Superannuation and Tax File Numbers background Super funds were not initially permitted to seek or to hold their members TFNs. The Senate Select Committee on Superannuation recommended in a February 1995 report that the use of TFNs for superannuation purposes be allowed subject to members consent - for tax, transfer of benefit, and internal fund administration purposes. This recommendation was accepted by the Government and Parliament, and super funds have been able to collect TFNs from their members since 1 February Super funds then gave members the opportunity to provide their TFNs, generally in a mid-year mail-out that year. Since then, funds have also endeavoured to collect TFNs from new members via their membership application forms, and accept TFNs from members over the phone. Many TFNs are also collected at the time of benefit payment, as members act to provide their TFN to avoid the tax penalty. All TFN collection practices provide for the members to be informed, either in writing or verbally, of the legal basis for collection, that declining to quote a TFN is voluntary and not an offence, and the consequences for not quoting a TFN. That is, meeting the requirements of the voluntary quotation principle. Page 7

8 While many administrative and call centre staff are authorised to input TFNs in electronic record-keeping systems, the data once entered is treated as highly confidential, and access to TFN information is extremely limited and on a needs-basis. Written records containing TFNs (e.g. member applications), for example, routinely have the TFN excised from the document by cutting or blacking it out. TFNs are typically recorded on the system in an encrypted form. Within the not-for-profit super sector, there has been longstanding concern about the growing incidence of lost super. This resulted in AIST and the ATO launching a Lost Super Week at the Conference of Major Superannuation Funds (CMSF) in March AUSfund, Australia s unclaimed super fund, was part of this campaign and made a submission to Government at that time calling for the ATO to be empowered to undertake TFN matching to reduce the incidence of lost super. Also in 2002, Senator Nick Sherry released the ALP s Super Options paper which calls for consideration of an annual automatic TFN superannuation sweeping mechanism to facilitate the transfer of legacy funds for employees. As the ALP remained in opposition until 2007, this was not initially acted upon but it has remained part of the ALP s policy platform. In 2006, the then Government released Simpler Super which included several measures to encourage the quotation of TFNs to super funds. These have applied from 1 July 2007: A super fund is not allowed to accept any personal or spouse contributions from a member if they have not supplied a TFN. Any such contributions must be refunded within 30 days. Other contributions (e.g. employer and salary sacrifice) are taxed at the top marginal rate if a TFN is not provided. A TFN is required in order to receive superannuation co-contributions. Also since 2007, employers have been required to provide each new employee s TFN (as quoted on their Tax Declaration Form) to the employee s super fund. These remain the rules at the start of These measures appear to be successful as a means of increasing the number of TFNs collected. The ATO has recently stated that at the time of the Simpler Super changes, the proportion of active accounts with a TFN quoted was 77 per cent, with the figure increasing to 95 per cent by 2010 ( Who is in the driver's seat of the SMSF car? Neil Olesen, Deputy Commissioner of Taxation, ASFA Conference, 12 November 2010). Of $6.1 billion in collections from super funds received during , only $85 million was collected from no-tfn payments related to contributions (ATO Annual Report 2010, p.38). However, the level of lost super remains troubling. At 30 June 2010 there were 5.8 million accounts on the Lost Members Register (up from 4.8 million on 30 June 2009), with a total value of $18.8 billion, an increase of $5.2 billion from 30 June This comprised 4.5 million lost uncontactable accounts ($12.2 billion) with the remainder being lost inactive accounts (ATO Annual Report 2010, p.102). Superannuation and Tax File Numbers current use Super funds do not and cannot by themselves verify that they have been provided with a valid TFN beyond testing the TFNs they have been provided against the TFN algorithm the limitations of which have already been discussed. TFNs that fail the test are rejected, but it is only when a fund receives a report back from the ATO that they can be sure the TFN belongs to the member who quoted it. Page 8

9 The Cooper Review recommended legislation should be amended to permit super funds to seek confirmation from the ATO in relation to each new member that the quoted TFN is correct (Recommendation 9.11(b)). This already occurs, but in a limited manner. TFNs are included in the annual member contribution statement super funds report to the ATO each year on 31 October. Where the ATO advises that an invalid TFN has been provided, the super fund must refund any personal contributions made by the member. In most cases, the ATO will simply advise that a TFN is either valid or invalid. The ATO will accept that a member has quoted their TFN if it is clear the member intended to quote their correct TFN - for example, if the TFN digits have been transposed. Where a super fund provides what it believes to be a valid TFN, but it has been cancelled, withdrawn or is otherwise wrong, the ATO can give the super fund the member's correct TFN. There have been some delays in the ATO providing reports responding to member contribution statements meaning TFN data entered into many superannuation administration systems has not been verified for months. However, the ATO advises super funds are informed that only a tiny proportion of TFNs are invalid. The Government has already made a general commitment to ensuring the ATO is adequately resourced to meet its existing superannuation responsibilities and the new functions it will administer under SuperStream. This commitment should be buttressed by further specific commitments to ATO funding of TFN management and enhancement. AIST recommends that, prior to the implementation of the TFN changes, the ATO be provided with appropriate resources to ensure that it is able to produce timely and accurate TFN reports for super funds. Real time online TFN verification A more effective manner of verifying TFNs would be for the ATO to provide super funds with access to real time online verification processes. This verification could be provided at the time a new TFN is entered into the administration system, and would enable the super fund to take immediate action in the event of the TFN provided not being accurate. Many super funds already subscribe to online identity verification systems, such as Vericheck, and most super funds are capable of incorporating an online TFN verification system. It would aid administrative efficiency, as problems would be identified, addressed with employers and members, and remediated within a few days or weeks. A member who may be uncontactable two years later perhaps because of the incorrect data provided will, in most cases, be readily contactable, either directly or through their employer, if the contact is made shortly after the data is provided. Online verification is already provided by the ATO for Australian Business Numbers (ABN). The ABN is a public number used in business dealings while a TFN is a personal number used for dealing with the ATO and other designated entities. It may be that the technology used to manage the ABN registration process can be employed to establish an online TFN verification process. The ATO has no publicly-announced plans to provide online verification, but its development would be consistent with the Cooper recommendation on TFN confirmation. Page 9

10 AIST recommends that the Cooper recommendation on TFN confirmation be implemented through the development of an online real time TFN verification tool. AIST recommends that the Government specifically fund the costs associated with the development of a superannuation industry-specific TFN verification tool by the ATO. TFN compromise The use of TFNs as primary identifier may result in instances of a TFN compromise emerging. The ATO defines TFN compromise as meaning a TFN that may have been lost, stolen or made known to another person and is therefore in danger of being used by another person for unauthorised or fraudulent purposes. In the context of superannuation, the misuse is likely to have already occurred, and may have occurred years before. The ATO separates TFN compromise into those instances with identity fraud implications and those without. Both categories are likely to occur in superannuation, although instances of identity fraud may occur without the fraudster trying to appropriate monies belonging to the rightful owner of the TFN. This is because TFNs may be misappropriated for the purpose of establishing a fraudulent identity for, say, the purpose of avoiding scrutiny from the Immigration Department or the ATO. The Commonwealth Ombudsman has recently published a report called Australian Taxation Office: Resolving Tax File Number Compromise in which he investigated cases where there were problems with the ATO s administration of TFN compromise. The investigation followed numerous complaints from individuals trying to resolve their issues. He had serious concerns about the ability of the ATO, both systematically and at individual case level, to resolve TFN compromise. He identified ten different areas within the ATO with responsibility for TFN administration and found a lack of coordination and oversight. The ATO responded to the report by noting that the case studies cited in the report are not typical of taxpayers experiences when a TFN is compromised. The ATO has established a Client Identity Support Centre with a single capability for the management and resolution of identity crime and TFN compromise cases. The ATO has also updated its website to include information about how to address problems with TFN compromise associated with identity theft. The ATO had also agreed to provide website information about TFN compromise arising from errors in information matching, but this does not appear to have been completed. ATO procedures used to advise staff [d]o not give a timeframe to the client for completion of the compromised case. Most compromised TFN cases take longer than 28 days, depending on the information to be transferred. The Ombudsman found that it generally took much longer to resolve cases, and the ATO web site now states: Page 10

11 We would normally expect the process to take six weeks from your interview [with the ATO to review identification documents] to the issue of your new TFN. During peak work periods at certain times of the year this can take longer. For example, between July and November it may take up to 10 weeks. The Simpler Super changes and regular TFN reporting by super funds is likely to have addressed many TFN problems already. Nevertheless, the ATO s Superannuation Consultative Committee should review the ATO s processes for dealing with superannuation-related TFN compromise, and the associated information that it provides to the public. AIST recommends that the ATO provide general information on its website about how to address problems with information matching. AIST recommends that, prior to the implementation of the TFN changes, the ATO be provided with appropriate resources to ensure that it is able to resolve issues of TFN compromise in a timely and accurate manner. The Cooper Review and TFNs The then Minister for Superannuation, Senator Sherry, announced a Super System Review (the Cooper Review) in 2009 and a panel was appointed to examine the governance, operation,efficiency and structure of Australia s superannuation system throughout the financial year. Recommendations included a package of measures set out in Chapter 9 designed to enhance the back office of superannuation, collectively called SuperStream. SuperStream includes proposals to allow the use of TFNs as the primary account identifier. Cooper noted there was widespread industry consensus on the need for a unique member identifier, and the suitability of TFNs for that role. He did so emphasising the ongoing importance of a member s voluntary quotation of their TFN. The Panel considers that, where a member has consented to the use of their TFN for the purposes of the superannuation legislation, it would be consistent with the intent of that consent for the TFN to be used for administrative purposes designed to reduce costs and so maximise member retirement benefits. (Super System Review, Final Report Part Two: Recommendation packages, p.292) Recommendation 9.11(a): Relevant legislation should be amended to permit superannuation fund trustees and their agents to: use TFNs as a primary search key to link contributions and rollovers with member accounts. Government response to the Cooper Review recommendation on TFNs The Government s response to Cooper was issued on 16 December 2010, with the Government accepting 139 out of 177 recommendations, including 9.11(a): The Government supports this recommendation and will introduce legislation to permit the use of tax file numbers (TFNs) as a primary search key from 1 July This was announced as part of the Government's Fairer, Simpler Superannuation election commitment. Page 11

12 Overwhelmingly though, the next step in relation to most of the recommendations is for further consultation with the superannuation industry. An overarching consultative group will be established, with four subgroups. One subgroup has been tasked to progress the design and implementation of SuperStream. The Government has committed to the implementation of two decisions by a specified date in 2011, one being TFN implementation. (The other concerns the treatment of collectibles held by SMSFs.) This will ensure TFN implementation is given the highest priority by both the super industry and Government. It also means the industry will anticipate and plan for the introduction of SuperStream through TFN implementation. The details of the Government s intentions on the use of TFNs were given in the key points of their Stronger Super document: The Government is committed to extending the use of an individual's TFN as the primary identifier of member accounts from 1 July This measure will assist individuals and trustees to locate and consolidate lost accounts and reduce unnecessary costs to the superannuation industry. Current rules governing how a superannuation fund can use members' TFNs can restrict the ability of trustees to improve the way their funds are administered. Some of these restrictions will be removed to allow superannuation fund trustees to use TFNs to: identify member accounts; for example, a superannuation fund trustee can use TFNs to confirm that two superannuation accounts held in the same name but with differing addresses, belong to the same person if the TFN details match; and facilitate the consolidation of multiple superannuation accounts held by the same member in either the same superannuation fund or across multiple funds. The measure will improve superannuation fund administration by providing trustees with a method of quickly and accurately identifying member accounts and facilitating account consolidation if acceptable to the member. Use of members' TFNs will continue to be subject to appropriate legislated safeguards to ensure the privacy and security of members' personal information. (p.9) This last point was made with even greater force in the Government's earlier Fairer, Simpler Superannuation 2010 election commitment: There are already strict legislative requirements on superannuation funds regarding the use and storage of members personal information, including TFNs. Any superannuation fund found breaching these rules would be subject to strict penalties. The above statements point to a range of issues that superannuation funds and their administrators will need to address and resolve over the next five months. Consolidation of multiple accounts The Cooper Review also recommended using TFNs to undertake auto-consolidation within a single fund without prior reference to the member (Recommendation 9.12). The Government response to this recommendation was to support this in principle providing the member is notified in advance, including of any impact on insurance cover, and has the right to opt-out. (p.56) Page 12

13 However, the Government went further than this in the key points of its response. It foreshadowed allowing super funds to use TFNs to facilitate the consolidation of members superannuation accounts between super funds. Allowing the use of TFNs as the primary identifier will both reduce the number of administration fees paid by members and the incidence of lost super. However, there is relatively little detail in the Cooper Review or the Government s response about the way in which this could be implemented. The consolidation process needs to be implemented in a way that addresses legitimate concerns, such as potential loss or reduction of insurance cover, loss of services provided, and protection from consolidation into high-fee superannuation products. The consolidation of superannuation accounts is a benefit for members who are not engaged with their super, and will result in these members not unnecessarily paying duplicate administration fees. It will also make it easier for them to keep track of their super. In order to avoid members being transferred from low cost to high cost funds, auto-consolidation should only occur between MySuper products. Multiple MySuper fund accounts should be consolidated into the MySuper fund for which the member has had the most recent activity. In the event of activity in more than one fund in a given period, consolidation should be into the account with the highest balance. However, the implementation of consolidation arrangements needs to be carefully considered to ensure it does not result in disadvantage to members who have made conscious decisions about their superannuation investments, insurance and associated services. Choice members should only be subject to auto-consolidation on an opt-in basis, and on the basis of multiple accounts being transferred into their nominated Choice fund. These issues represent significant challenges for super funds, and may require a re-examination of cost structures for superannuation administrators. Therefore, this should be the subject of a specific project commissioned by the SuperStream subgroup. These issues suggest that implementation of these initiatives should take place in the following order: Use of TFNs as primary identifier by 1 July 2011 Implementation of MySuper by 1 July 2013 Allow auto-consolidation of MySuper accounts after 1 July AIST recommends that the SuperStream subgroup be tasked with the task of liaising with APRA and the superannuation industry to develop a set of consolidation guidelines. AIST recommends that consolidation arrangements between super funds operate on an opt-out basis for members of MySuper products, and on an opt-in basis for members of Choice products (ie, members who have any investment, insurance or other service arrangements beyond default levels) Page 13

14 Next steps The major superannuation administrators are preparing functional requirements for implementing the TFN reforms. However, it appears that that the most significant system upgrades will need to be undertaken by the ATO. The Government should consider resourcing the ATO for the cost of these upgrades as a matter of urgency. As a result of meeting the requirements of Lost Member Register reporting, surcharge reporting and member contribution statements, the superannuation industry is experienced in implementing TFN reforms. Subject to the regulatory details for this reform, and a draft of these being available for industry consideration at an early opportunity, the industry will be able to prepare business requirements and meet the deadline of 1 July 2011 for implementation of the changes. Existing business rules governing the administration use of TFNs will need to be written. Changes will need to be made in core systems, e-commerce, clearing house and ATO reporting. AIST recommends that the Government makes a specific and immediate commitment to funding the ATO s costs of extending the use of an individual s TFN as the primary identifier of member accounts. Page 14