Introduction

1. The Australian Taxation Office (the Tax Office) is the Australian Government's principal revenue collection agency. The role of the Tax Office is to manage and shape taxation, excise and superannuation administrative systems that fund services for Australians, giving effect to social and economic policy.^[1] In 2009–10 the Tax Office collected over $253 billion in tax, superannuation and excise revenue, incurred expenses of some $3 billion, and had a staffing level of 21 766.^[2]

2. Superannuation is intended to provide individuals with a secure income during retirement, above the safety net provided by the age pension, by investing a proportion of their income during their working lives. In 1992 the Government announced a system to be known as the superannuation guarantee, in which employers would be required to make tax-deductible superannuation contributions on behalf of their employees. This resulted in a significant extension of the number of employees covered by superannuation, and allowed the Government to enforce superannuation arrangements through its taxation powers.^[3]

3. Superannuation is a large and complex area of administration. Australia's superannuation regime is designed to ensure the benefits of superannuation members are secure. The Australian Prudential Regulation Authority (APRA) is the main regulator of the superannuation industry. Under the Superannuation Industry (Supervision) Act 1993, there are two major categories of superannuation fund: regulated funds, and self-managed superannuation funds (SMSFs). Regulated funds—also known as APRA funds—are supervised by APRA, and their trustees must be corporate bodies with a set of governing rules.^[4] SMSFs are regulated by the Tax Office. They must have fewer than five members, and all of their trustees must be individual members of the fund.^[5] The Lost Members' Register

4. The Tax Office's role in the superannuation system, along with regulating SMSFs, is to administer the co-contributions scheme,^[6] assist individuals to reunite with lost superannuation, and to look for other opportunities to improve individuals' engagement with their superannuation savings.^[7] APRA funds may have lost members with whom they have been unable to maintain contact or who are no longer making contributions to their accounts, and these funds are subject to the Tax Office's arrangements for reuniting individuals with their lost superannuation. The Tax Office-regulated SMSFs are unlikely to have lost members, given that their management is undertaken by trustees who must also be members of the fund. As a result, SMSFs are not subject to the Tax Office's lost superannuation arrangements.

5. To assist individuals to reunite with their lost superannuation, the Tax Office facilitates a relationship between lost members and superannuation funds through the Lost Members Register (LMR). The Superannuation (Unclaimed Money and Lost Members) Act 1999 (the Act) provides for the administration of the LMR. The LMR is intended to help those workers at risk of becoming ‘lost' members, often due to loss of paperwork or disrupted employment patterns, such as for casual and itinerant workers. The LMR aims to reunite members with their accounts before the money in those accounts becomes unclaimed.^[8]

6. At 30 June 2010 the LMR contained information about 5.8 million member accounts with accumulated balances of some $18.8 billion. These accounts most commonly contained balances of between $200 and $500, held by individuals aged between 35 and 40 years.

7. The money in accounts recorded on the LMR remains with the superannuation fund and continues to attract all of the same benefits and costs as accounts which are not ‘lost'. However, by claiming or consolidating their lost accounts, individuals may reduce the costs they incur in the management of their superannuation and as a result benefit from increased retirement savings. Superannuation industry regulations protect members from having their small accounts (less than $1000) eroded by administration fees.^[9] However, this protection does not apply to premiums for life insurance policies incorporated into many superannuation products.^[10]

8. Responsibility for the LMR was allocated to the Tax Office because of its experience in systems administration.^[11] The Commissioner must keep a register of lost members^[12] that contains information given to the Commissioner by superannuation providers. The register may also contain any other information given to the Commissioner for other purposes and which is of the type contained in the register.^[13] Superannuation arrangements increasingly encourage individuals to provide their Tax File Number (TFN), which superannuation funds must then report to the LMR as appropriate.^[14] The Tax Office uses TFNs as the basis for matching reports of lost members to other information about those individuals in Tax Office systems.

9. The LMR is funded in part by superannuation funds through the financial sector levies imposed by APRA. The Tax Office has also received funding through the Super Simplification initiative to improve the information technology systems supporting the LMR and to undertake activities to alert individuals to the location of their lost superannuation accounts.

10. The provision of access to the LMR is an important part of the Tax Office's overall role in the superannuation system. The Tax Office offers two mechanisms for members, tax practitioners and superannuation funds to search for lost members' superannuation benefits. These are:

• SuperSeeker; an internet-based tool which enables members to use their name, TFN and date of birth to search the LMR, and provides them with possible matches on their lost accounts; and
• SuperMatch; an Electronic Commerce Interface (ECI)^[15]  tool which superannuation funds can search on behalf of any of their members for lost superannuation that may be on the LMR.

Audit objective and scope

11. The objective of the audit was to examine the Tax Office's administration of the Lost Members Register. In particular, the audit examined the Tax Office's governance arrangements for the LMR; its strategies for managing data quality; and its provision of access to LMR data. The audit also considered how the Tax Office's administration of the LMR has responded to recommendations made in the ANAO's earlier review (Audit Report No.17, 2005–06 Administration of the Superannuation Lost Members Register), relevant changes in funding and legislation supporting the LMR, as well as the Change Program.^[16]

Overall conclusion

12. During the period 2004 to 2010 the number of superannuation accounts classified as lost, and included on the LMR, has risen from some 5.0 million to 5.8 million, peaking at approximately 6.4 million accounts at 30 June 2008.

13. Of the 5.8 million accounts recorded on the LMR at 30 June 2010, the Tax Office has been able to link 4.9 million accounts, through each account holder's TFN, to 3.7 million people identified in its tax administration systems. This leaves approximately 900 000 accounts valued at some $1 billion which are considered to be ‘unmatched'. These unmatched accounts represent the core of the lost superannuation issue that the LMR was established to address.

14. The way in which the Tax Office currently administers the LMR system requires a high confidence identity match based on an individual's TFN. This means that the 900 000 unmatched accounts are not able to be reunited with their owners by the Tax Office, either through outreach activities carried out by the Tax Office or by using ‘self-service' options such as its SuperSeeker search facility.

15. Since the inception of the LMR, successive governments have addressed the issue of lost superannuation with a range of legislative changes and funding arrangements designed to increase the number of members who are able to find their lost superannuation or to be removed from the LMR for other reasons. The Tax Office has budgeted more than $100 million of its special Super Simplification funding to activities specifically related to the LMR. However, there is scope for the Tax Office to make improvements to its administration in a number of areas.

16. The Tax Office has an established governance framework that facilitates the management of its complex administrative structures and is designed to enable business areas to develop specialist skills and apply them to a range of ‘products' like the LMR. This framework includes planning and reporting processes that are based on risk analysis and management.

17. The LMR is one component of the Tax Office's administration of the Australian superannuation system. Planning and reporting processes for the LMR are appropriately managed within the Tax Office's governance framework, and risk analyses are used to inform decision-making. Some identified risks, such as risks relating to funds' compliance with LMR reporting obligations, have also been successfully managed within this framework. There is scope for improvement in developing specific and measurable targets for LMR activities, in monitoring the effectiveness of some risk mitigation measures, and in reporting externally on the costs and effectiveness of the LMR regime. In particular, the Tax Office has not clearly explained to industry the extent to which LMR activities are funded through the financial sector levy.

18. The implementation of the LMR within the Tax Office's ‘easier, cheaper and more personalised' system (Change Program), completed in April 2009, provided an opportunity for the Tax Office to re-examine and re-engineer its processes for administering the LMR. However, this opportunity was not fully exploited, and the current systems reflect a number of inherent shortcomings. For example, the Tax Office identified data quality issues as a risk to its management of the LMR, but placed considerable reliance on technological updates provided by its Change Program system implementation to manage these risks, rather than addressing the difficulties caused by the existing reporting arrangements. As a result, the Tax Office has developed the new LMR on the basis of existing processes, which resulted in the implementation of a system that replicates old problems in a new environment.

19. The upgrade of the LMR as part of the Change Program has provided an ability to better categorise the lost members represented on the register according to the two sub-categories of ‘inactive' members (those not making contributions to their funds) and ‘uncontactable' members (those who have ceased contact with their funds) described in the Act. Some data analysis capabilities originally specified for the LMR as part of the Change Program upgrade have not yet been delivered. The Tax Office is pursuing new approaches to analysis of LMR data, such as matching with Income Tax Return and Member Contributions Statement data. These processes can help to identify the correct contact details for lost members, and could potentially help to link lost superannuation with active accounts. These processes are not currently well supported by Tax Office IT systems, and require substantial manual intervention.

20. A key tool to assist members to reunite with their lost superannuation is the Tax Office's SuperSeeker system. SuperSeeker allows individuals to search the LMR for details of their lost accounts, and also provides assistance with contacting funds to claim or roll over these lost accounts. ‘Unmatched' accounts, which the Tax Office has been unable to link with a high degree of confidence to a TFN in its systems, are not made available for searching within SuperSeeker. SuperSeeker search capabilities are basic, and some members who have ‘matched' accounts may not find their lost superannuation because they have not entered search terms exactly as they are recorded in Tax Office systems. By considering a more flexible approach to data matching and searching in SuperSeeker, the Tax Office may be able to make lost accounts easier to find by a larger proportion of members on the LMR.

21. The Tax Office's role in relation to lost superannuation extends beyond maintaining the data in the LMR to include taking proactive steps to reunite members with their lost accounts. This has led to a range of activities aimed at publicising the LMR, and communicating directly with members about their lost accounts. Some of these activities, such as the ‘letters campaigns', have attracted considerable additional government funding. The Tax Office is able to state in broad terms the level of success for only some of these initiatives. However, it has not conducted sufficient analyses of its LMR communications strategies to enable informed comparisons of the most efficient and effective tools for either reuniting members with their lost superannuation or for reducing the number of accounts classified as unmatched.

22. The ANAO has made five recommendations aimed at improving the transparency of LMR funding arrangements, increasing the Tax Office's ability to analyse lost members data and improve its quality, providing more flexible access to the LMR, and better understanding the effectiveness of LMR communication strategies.

Key findings by chapter

Governance arrangements (Chapter 2)

23. The Tax Office has an established framework for governance of its business activities, particularly in relation to activities that are managed across business lines. The management arrangements for the Superannuation business line are guided by the Compliance sub-plan, and provide an appropriate focus on the strategic management of the LMR. Operational aspects of the LMR are administered through the Enterprise Solutions and Technology (EST) and Operations sub-plans that contribute expertise in organisational information technology solutions and in managing taxpayer interactions. These arrangements enable business lines to focus on their core roles and areas of expertise, although they also introduce a degree of complexity to the management of initiatives such as the LMR, requiring effective communication between business lines and overall monitoring arrangements.

24. The performance measures identified for the LMR are appropriately articulated in higher level Tax Office plans but could be made more specific to the LMR. Similarly, the measures at all levels lacked clear and measurable targets, and were not clearly identified and reported against in management reports. The Tax Office could benefit from reviewing its performance measures and targets for the LMR at all levels of planning to improve their usefulness as a management and accountability tool.

25. Overall, there is an established governance system in place to identify and address risks in appropriate forums. However, there is scope to improve some elements of the risk management process for the LMR, particularly by better monitoring the effectiveness of existing risk mitigation strategies. The Tax Office identified data quality issues as a risk to its management of the LMR, and relied on its Change Program system implementation to address these risks. This approach has resulted in the development of a system that replicates old problems in the new environment. The opportunity to re-examine and re-engineer its processes to reduce data errors was not taken.

26. Section 41 of the Superannuation (Unclaimed Money and Lost Members) Act 1999 (the Act) requires the Tax Office to report on the ‘working' of the Act after the end of each financial year. The Tax Office does this through its annual report to Parliament. The commentary on the LMR in the annual report is very brief and does not provide trend data that would indicate the extent to which the Act is working to reunite members with their lost superannuation, or information on the extent to which superannuation funds are able to comply with their reporting requirements. LMR reporting also does not indicate the targets that have been set for LMR activities, against which results should be measured.

27. The LMR is funded in part by the financial sector levy charged to the superannuation industry by APRA. To determine the amount to be charged for the Tax Office's component of the levy each year, the Tax Office uses an organisation-wide Strategic Costing Framework (SCF). The SCF enables the capture of cost information for nominated projects and activities regardless of which part of the organisation carries out the activities. This is important given that key activities for the LMR are carried out outside the Superannuation business line.

28. In addition to funding through the financial sector levy, the Tax Office has received additional appropriations for activities supporting the LMR through the Super Simplification initiative. Activities funded through such special funding arrangements are not included in the calculation of the financial sector levy to be charged to industry. This is not made clear in the Tax Office's explanation to industry through APRA of its calculation of the levy each year, with the result that industry representatives do not clearly understand the extent of the activities they are funding. By providing a more specific explanation of its costs and activities in relation to the LMR, the Tax Office would give stakeholders a clearer understanding of the sources of funding used to manage the LMR.

29. The majority of funds collected through financial sector levies are to recover APRA's costs in undertaking its industry supervision responsibilities. In accordance with the Australian Government's Cost Recovery Policy, APRA prepares Cost Recovery Impact Statements (CRIS) in relation to this role. The Tax Office has not prepared a CRIS in relation to the cost component associated with managing the LMR.

Data quality (Chapter 3)

30. Superannuation funds report their lost members twice yearly through a Lost Members Statement (LMS). The Tax Office mitigates the risks of non-lodgement of LMSs using a targeted approach to funds it assesses as being at high risk of not meeting their LMR reporting obligations. This mainly involves contacting funds that fail to lodge an LMS, and relies on the LMR Product Team's knowledge of the population of superannuation funds to identify which funds should be submitting an LMS. The rate of late and non-lodgement of LMSs by superannuation funds has consistently fallen over recent years.

31. To address risks associated with the lodgement of incomplete or inaccurate lost member data by funds, the Tax Office has adopted mitigation strategies involving both education and compliance. Key elements of these have been the establishment of a dedicated Client Relationship Team (CRT), development of the LMR Protocol Document that provides administrative and technical guidance to superannuation funds, and a program of active compliance audits of funds.

32. LMS accuracy and completeness audits are conducted according to well-defined audit processes, underpinned by the requirements of the Taxpayers' Charter. The framework and core processes for these audits are soundly based. In addition, funds reported a good relationship with both the CRT and the audit teams.

33. LMSs are entered into a Tax Office database, and the data is validated through checks of data structures and required components. Identity matching is performed as the data is loaded into the Integrated Core Processing (ICP) system.^[17] The Tax Office currently requires superannuation funds to report on their lost members using an ‘exception' system, where only members who have had a change in their previous status are reported to the LMR. An alternate method, which was used in preparation for the transfer of the LMR to ICP in 2008, is known as the ‘re-report' method. Re-reporting involves the funds reporting the details of all of the members they consider meet the criteria of ‘lost' at a point in time, regardless of whether they have been previously reported to the register.

34. LMR reporting currently uses the ‘exception' system. Using this system, the LMR matches a report of a ‘found' member to it's previously reported ‘lost' member record using three data elements. These data elements must be exactly matched in both the ‘lost' and ‘found' records. If these elements of the two records do not match exactly, the member will continue to be recorded as lost.

35. While the Tax Office will inform funds of errors, its systems do not reject reports of accounts which have been reclassified by the fund as found but which do not exactly match the details of that account when it was previously reported as lost. Instead, funds are expected to correct the account data to achieve an exact match and resubmit the previously incorrect reports. If funds do not do this, the data in the LMR goes uncorrected and becomes increasingly unreliable as time goes on. The 2008 re-report process appeared to have largely eliminated these errors. Since that time reporting has returned to the exceptions system, and the Tax Office has already observed a corresponding deterioration in data quality.

36. The process adopted by the Tax Office to perform identity matching has implications for how people access LMR data about their lost accounts. After identity matching exercises are undertaken, the residual member accounts in the LMR are regarded as ‘unmatched'. This is because the Tax Office does not have sufficient confidence that the information it holds can identify the correct person and can therefore assign the correct TFN. However, the Tax Office's key tool for enabling members to identify and claim their lost superannuation requires searching using an individual's TFN. Any ‘unmatched' records in the LMR are excluded from these searches. This means that a decision not to accept a lower-confidence match potentially precludes those records from being made available and hence being identified by their owners.

37. In 2009 the Tax Office undertook a pilot project, subsequently assessed as successful, to provide up-to-date addresses of lost members to superannuation funds so that they could re-establish contact with those members. While such an approach is likely to reduce the volume of members represented on the LMR, the Tax Office would need to be confident that superannuation funds will act appropriately on this information. Funds will require a high confidence match before they will be able to verify members' details using Tax Office data. Alternately, there are potential advantages in recording lower confidence matches that would assist members in searching for lost superannuation. The Tax Office could record the level of confidence it has applied to each matched identity and initiate subsequent actions having regard to the indicated confidence level.

38. The Tax Office is aware that a significant hurdle to reducing the size of the LMR lies in encouraging members to take action in relation to their lost accounts. One of its strategies to address this problem is the development of a ‘portability form'. This form is designed to make it easier for members to claim or roll over lost accounts by pre-filling a ‘request to transfer' form with information from the LMR. By also drawing on Member Contribution Statement (MCS) data about active superannuation accounts, the Tax Office could assist lost members to identify both the account they want to close and roll over and the account to which they would like to transfer their funds.

39. A purpose of the LMR is to ‘reduce at an early stage the number of accounts which become unclaimed money',^[18] which must then be paid by funds to the Commonwealth. Generally, unclaimed money is lost superannuation which should be paid to the member, usually because the account owner has reached retirement age. The Act requires the Commissioner to keep a register of unclaimed money, and penalties apply to superannuation funds who do not report on unclaimed money or pay amounts to the Commonwealth as required by law. Late payments of unclaimed monies are also subject to the General Interest Charge.^[19] There is a close link between the LMR and the Unclaimed Money Register. Cross-checking between the two registers provides a useful quality check for both databases, and provides an avenue for the Tax Office to identify lost superannuation accounts which should have been paid to it as unclaimed money. However, there is currently no direct connection between these two databases, and only manual comparisons between the two are possible.

40. Data analysis can help to highlight compliance issues and reporting errors, identify systemic data processing problems, and inform overall strategy by recognising trends in the population represented by the data. The LMR Product Team has identified a lack of management reports from the LMR database as a key area of concern since the transfer to ICP. While both regular and ad hoc reports are available, they often require significant levels of manual work in their preparation. In addition, any ad hoc reports which the Superannuation LMR Product Team request require the involvement of the Client Account Services (CAS) business line. This can inhibit innovation in developing strategies to address lost superannuation issues, as CAS resourcing is required to assist with investigative queries of the database.

Data access by stakeholders (Chapter 4)

41. SuperSeeker is a web-based tool that provides a search facility for the LMR. SuperSeeker searches for lost members who have been matched against other Tax Office system data. The data requirements for searching SuperSeeker are very specific, and if the individual does not input and search for details exactly as they appear in the LMR, SuperSeeker will not return a result. This requirement serves as a potential barrier to reuniting lost accounts with their owners.

42. SuperMatch is a search function which allows superannuation funds to match, in bulk, details of their members against information on the LMR. Funds generally advised the ANAO that they found SuperMatch to be a useful tool for identifying lost accounts for their members. The Tax Office is currently unable to record how many successful matches are produced by SuperMatch, or how many lost accounts may be removed from the LMR by funds as a result of SuperMatch searches. There are not currently any performance measures or targets, such as system availability or timeliness of searches, for SuperMatch and there has been no reporting on its effectiveness.

43. The Tax Office aims to increase public awareness of how to prevent superannuation from becoming lost. To achieve this objective, and to raise awareness of SuperSeeker, the Tax Office uses a wide range of communication tools and channels. The selection of marketing and communication approaches for the LMR is informed by responses to the Tax Office's annual Community Perceptions Survey (CPS).

44. There are difficulties in measuring the outcome of some marketing activities. This is because many competing influences, such as compliance activities, media interest, superannuation fund promotions and the superannuation environment generally can distort the impact of a specific Tax Office campaign. However, the Tax Office is able to link the timing of its advertising and other paid campaigns to spikes in traffic on the SuperSeeker web page. There is currently no mechanism for assessing the effectiveness of paid media campaigns in reducing the number of lost member accounts, and demonstrating definitive links is likely to be difficult.

45. The Tax Office has developed an ‘e-tax' software program that individuals can use to prepare and lodge their income tax returns. In 2008 the Tax Office began using e-tax to provide taxpayers with a message about lost superannuation, and a link to the SuperSeeker website. The effectiveness of these targeted messages in encouraging individuals to search SuperSeeker has not been evaluated. Using e-tax could enable closer targeting of messages by taking into account answers to questions in e-tax about the individual's circumstances. It also has the potential to track the responses to the messages that are delivered. As it is likely to be a relatively low cost tool, the Tax Office could provide an important benchmark to assist in measuring the effectiveness of other communication channels by conducting evaluations of the effectiveness of its e-tax messages.

46. A large proportion of the Tax Office's expenditure relating to lost superannuation has been through its various telephony and correspondence campaigns that aim to alert individuals to their lost accounts and motivate them to reclaim them. In 2008–09 funding was provided for one million letters and 250 000 account reviews by phone. Following difficulties with ICP, this target was reduced to 50 000 letters and 125 000 telephone account reviews. The revised targets were not met, with only 69 586 accounts reviewed for 30 679 members, and 12 056 letters sent. The Tax Office has not conducted a detailed analysis of which target groups have responded best to letters and telephony campaigns but notes an overall success rate of 18 per cent for letters campaigns and 16 per cent for telephony. Only matched accounts are included in letter and telephony campaigns.

47. In the 2006–07 budget, the Tax Office was provided with additional funding to proactively contact lost members and to develop a ‘portability form'. Few people who conduct a successful search using SuperSeeker also download a portability form. It is not currently possible to determine whether people who access the form successfully fill it in and transfer their superannuation. A lack of knowledge about the detail of their active superannuation accounts may prevent some members from taking this step. Matching of LMR data against superannuation Member Contribution Statements and the planned development of an electronic portability form may assist members to facilitate such transfers.

Summary of agency response

48. The Tax Office's full response is at Appendix 1. The Tax Office welcomed the report and agreed to the five recommendations.

49. The Tax Office noted that the report identified opportunities for further improvement. These will be considered along with other organisational priorities, including the recent Super Reform program.

Footnotes

^[1] Australian Taxation Office, Annual Report 2008–09, Canberra, 2009, p. iii.

^[2] Australian Taxation Office, Annual Report 2009–10, Canberra, 2010, pp.iv–v, 259.

^[3] Australian Prudential Regulation Authority, ‘A recent history of superannuation in Australia', APRA Insight Issue Two, 2007, pp.3–4.

^[4] Superannuation Industry (Supervision) Act 1993, s19.

^[5] Superannuation Industry (Supervision) Act 1993, s17A.

^[6] The superannuation co-contribution is a government initiative to help eligible individuals boost their superannuation savings by matching personal superannuation contributions—currently up to $1000—with an equal government contribution.

^[7] Australian Taxation Office, Annual Report 2008–09, Canberra, 2009, p. 87.

^[8] In general, unclaimed superannuation is a superannuation account that is payable to the Tax Office or to a state or territory authority because the member has reached the eligibility age (65 years), and for which the superannuation fund has not received a contribution in the last two years and has not been able, after reasonable efforts, to contact the member for five years.

^[9] Superannuation Industry (Supervision) Regulations 1994, Regulation 5.17 s2.

^[10] Superannuation Industry (Supervision) Regulations 1994, Regulation 5.15D.

^[11] Superannuation (Unclaimed Money and Lost Members) Bill 1999, Second Reading Speech, Monday 23 August 1999.

^[12] Criteria for defining lost members are set out in Superannuation Industry (Supervision) Regulations 1994, Regulation 1.03A.

^[13] Superannuation (Unclaimed Money and Lost Members) Act 1999 ss23(2).

^[14] While TFN quotation is not compulsory to open a superannuation account, accounts without a TFN cannot receive personal contributions or government co-contributions.

^[15] ECI is the electronic commerce interface which allows superannuation funds and other businesses to interact electronically with the Tax Office. It is particularly designed to assist organisations that need to exchange large amounts of data with the Tax Office.

^[16] Change Program is the name given to the Tax Office's long-term project to replace its information and communications technology systems in support of its goal to make compliance with tax and superannuation law easier, cheaper and more personalised.

^[17] ICP is a suite of software, incorporating the key structural elements of a client register, an accounting sub-system and a generic forms-processing sub-system.

^[18] Superannuation (Unclaimed Money and Lost Members) Act 1999 s7.

^[19] The General Interest Charge (GIC) is a uniform interest charge imposed where there is a late payment of a tax debt. It replaced the late payment penalties system from 1 July 1999 and is a common rate of interest which is applied across all liabilities administered by the Tax Office.