Bills Digest No. 171 2004–05
Superannuation Legislation Amendment (Choice of
Superannuation Funds) Bill 2005
WARNING:
This Digest was prepared for debate. It reflects the legislation as
introduced and does not canvass subsequent amendments. This Digest
does not have any official legal status. Other sources should be
consulted to determine the subsequent official status of the
Bill.
CONTENTS
Passage History
Purpose
Background
Main Provisions
Concluding Comments
Endnotes
Contact Officer & Copyright Details
Passage History
Superannuation
Legislation Amendment (Choice of Superannuation Funds)
Bill 2005
Date
Introduced: 26 May
2005
House: House of Representatives
Portfolio: Treasury
Commencement:
Royal Assent or 1 July
2005, depending on the section.
This Bill gives effect to
announcements made by the Government during 2005 of measures to
ease the administrative burden for business and employees in
complying with the requirements of the Choice of Fund regime.
The Superannuation Legislation Amendment (Choice of
Superannuation Funds) Bill 2005 (the Bill) amends the:
-
Small Superannuation Accounts Act
1995
-
Superannuation Guarantee (Administration) Act
1992
-
Superannuation Industry (Supervision) Act 1993, and
-
Retirement Savings Account Act 1997.
This Bill also closes the Superannuation Holding Accounts
Special Account to new employer deposits from 1 July 2006.
Since 1996 the Government has campaigned to give most employees
the right to choose which superannuation fund receives the
Superannuation Guarantee contributions made on their behalf by
their employers. This policy was implemented by the
Superannuation Legislation Amendment (Choice of Superannuation
Funds) Act 2004 (which received Royal Assent on 30 June 2004).
The Choice of Funds regime commences on 1 July 2005.
Under the Choice regime most employees may:
-
only using the specified form, select an eligible choice
superannuation fund to receive Superannuation Guarantee (SG)
contributions made on their behalf
-
again, only using the specified form, change their nominated
fund at the end of every 12 month period. If the employer agrees,
they may nominate a new fund at less than 12 month periods.
If the employee is satisfied with the employers default fund
they may decline the opportunity to choose a fund. If they do not
at first choose a fund they may do so at any later time.
An employer must give there employees (except those who are
specifically exempt from the Choice regime see below) the specified
form to use when choosing a fund.
If the employee does not nominate a fund, the employer must
choose an eligible choice fund (i.e. a default fund) to receive
their SG payments. In most cases this will probably be the employer
s current fund.
Under Section 32D of the Superannuation Guarantee
(Administration) Act 1992 (SG Act) the Superannuation Holding
Accounts Special Account , administered by the Australian Tax
Office, cannot be an eligible choice fund for the purposes of the
Choice Regime.
Penalties apply to the employer if they fail to meet the Choice
regime s requirements. However, these penalties are low, for
example the maximum penalty is $500 per employee, per notice
period. The Commission for Taxation can reduce the penalty,
including to nil. Actions that may lead to a penalty can be:
-
failure to provide the specified form within the required
period, or
-
making SG payments on behalf of an employee to a fund that is
not that employee s chosen fund.
Generally, contributions made to the following funds are taken
as being conformity with the Choice regime:
-
commonwealth Government defined benefit funds
-
certain private sector defined benefit funds(1)
-
funds specified in State industrial awards
-
funds specified in certain Victorian agreements
-
funds prescribed in Commonwealth, State or Territory
legislation, and
-
funds specified under an Australian Work Place Agreement or
Certified Agreement.(2)
This means that employees, who have contributions made on their
behalf to such funds will not be offered the specified choice form
and will not be able to choose a fund to receive SG contributions
made on their behalf.
These measures contained within this Bill were announced in the
Minister for Revenue and Assistant Treasurer s Press Release No.
003 of 19 January 2005 and Press Release No. 016 of 14 March 2005,
following widespread consultation with business, the superannuation
industry and consumer groups.(3)
There has been little public reaction to these particular
changes to the Choice regime.
The proposed changes will streamline the introduction of the
Choice regime from 1 July 2005. There are advantages and
disadvantages to particular measures. These will be discussed in
the Main Provisions section below.
The opposition has not made any comments on these particular
measures to date.
Item 1 of Schedule 1 amends the Small
Superannuation Accounts Act 1995 to effectively close the
Superannuation Holding Accounts Special Account (SHASA) ,
administered by the Australian Tax Office (ATO), to new deposits
from 1 July 2006.
SHASA acts as a place where SG contributions, that cannot be
made to an employee s fund, may be paid by an employer in
satisfaction of that employer s obligation under the Superannuation
Guarantee regime. For example, a person may work, say as a fruit
picker, and suddenly leave that employer without providing a
forwarding address or details of where to pay their SG
entitlements. In these circumstances an employer could pay the
employee s SG entitlements into SHASA.
SHASA pays no interest, and does not charge any fees. The ATO is
required to try and make regular efforts to contact individuals
with monies in SHASA and arrange for these monies to be transferred
into superannuation funds that pay a rate of return (and also
charge a fee).
In his Second Reading Speech the Minister for Revenue and
Assistant Treasurer noted that:
The Superannuation Holding Account Special Account
was originally established to receive small superannuation amounts
from employers who cannot find a superannuation fund. This facility
is no longer needed, as Retirement Savings Accounts (RSAs) offer
similar low-cost benefits for employers.(4)
Retirement Savings Accounts are superannuation accounts operated
by banks and other financial institutions. They may be thought of
as bank accounts that operate within the superannuation
environment.
It is not clear that RSAs are low cost accounts. In the year to
30 June 2004 the reported total expenses of RSAs were about 2.3 per
cent of assets under management This is high compared with an
average fees and expenses of about 1.29 per cent of assets under
management across the entire superannuation industry in the same
year.(5) Further, exit fees may also
apply.(6)
Such fees would be acceptable if the investment performance of
RSA was high. As at 11 March 2005 stated rates of return on the
Commonwealth Bank s RSA were between 2.95 and 5 per cent per annum,
depending on the balance in the account.(7) Generally,
these rates of return are far less than those achieved by other
investment entities in the superannuation environment.
As amounts going into RSAs in these circumstances are likely to
be comparatively small it is more than likely that the rate of
return on such accounts will be towards the lower end of this
range.
Item 7 of Schedule 1 amends the SG Act to allow
an account under section 8 of the Small Superannuation Accounts
Act 1995 to be an eligible choice fund for Choice regime
purposes, but only before 1 July 2006.
Item 6 of Schedule 1 specifies that if an
employer imposes a direct cost or charge on the employee as a
consequence of having to contribute to the employees chosen fund
then that contribution is taken not to satisfy the requirements of
the Choice regime.
As previously noted, the penalty for not meeting the Choice
regime s requirements is capped at $500 per employee per notice
period. The Commissioner for Taxation has the option of reducing
this penalty by any appropriate amount, including to
nil.(8) Under section 21 of the SG Act the Commissioner
must make available, on the internet, guidelines governing the
reduction of penalties under the Choice regime.(9)
Whether these penalties are effective in deterring such behaviour
remains to be seen.
Item 9 of Schedule 1 amends the SG Act to allow
any fund chosen in conformity with the Choice regime before 1 July
2005 to be that employee s chosen fund from 1 July 2005, or two
months after the choice was made, whichever occurs later.
This allows employees who commenced work with an employer before
1 July 2005 to choose a fund. They do not have to be offered the
choice of fund after 1 July 2005 (see Item 11 Schedule
1, proposed new section 32NA(3) in the SG Act). Nothing in
this Bill, or the other provisions of the Choice regime, prevents
such employees from making another choice of fund after 12 months
have elapsed.
Item 10 of Schedule 1 simply allows the
employer to give the employee a new Choice form if, after they had
given the first form, discover they cannot in fact contribute to
the default fund specified on the first choice form.
The updated choice form must be given within 28 days of an
employer first becoming aware that they cannot contribute to the
default fund specified on the first choice form.
As noted above, participation in the Choice
regime is done via the filling out of the prescribed Choice form.
Under Section 32N of the SG Act an employer must give an employee a
Choice form:
-
within 28 days from 1 July 2005
-
within 28 days of an employee s written request to do so
-
within 28 days of an employer becoming aware of an employee s
chosen fund ceasing to be their chosen fund due to the employer s
inability to contribute to that fund or the fund ceasing to satisfy
the requirements to be an eligible choice fund under section 32D or
the SG Act, and
-
within 28 days of the employer changing the fund to which they
are making contributions on behalf of the employee.
The following amendments more precisely define circumstances
where the prescribed Choice form does not have to be provided. In
the following comments the description of the proposed amendments
are indented and in bold text and the discussion of each provision
(if any) is in normal text.
Item 11 of Schedule 1 also
amends the SG Act to clarify circumstances where a Choice form need
not be offered to:
to members an unfunded public sector
superannuation scheme who are not
Commonwealth employees(where those
Commonwealth employees are members of the Commonwealth
Superannuation Scheme (CSS) or Public Sector Superannuation Scheme
(PSS)) (proposed subsection 32NA(4) of the SG Act)
Under section 61 of the SG Act, an unfunded
public sector scheme is a defined benefit superannuation scheme in
respect of which:
-
no fund has been established, and
-
all or some of the amounts that will be required for the payment
of the benefits are not paid into any fund established of the
purposes of that scheme, or
-
are not paid until the members become entitled to receive the
benefits.
Effectively, this provision excludes members in
unfunded state government superannuation schemes from participating
in the Choice regime.
Commonwealth employees who are not members of
either the PSS or CSS will be offered the Choice of superannuation
fund from 1 July 2006, at the latest.
a person who ceases to be an employee
before the end of the period for giving the standard choice form to
that employee (proposed subsection 32NA(5) of the SG
Act)
As noted above, the period for giving the Choice form to an
employee is 28 days after various events take place.
where it was a condition of employment
that the employee choose a superannuation fund, and they have not
done so and the employer does not have an arrangement to make SG
payments into a superannuation fund on the behalf of that employee
(proposed subsection 32NA(6) of the SG Act)
where the employee is a member of the
employer s defined benefit fund, and that fund is in surplus
(proposed subsection 32NA(7) of the SG Act)
When a defined benefit fund(10) is in surplus it has
enough accumulated assets to pay all of its expected liabilities.
In these circumstances employers are often not making contributions
to such funds on behalf of there employees, as their superannuation
obligations have been satisfied. Subsection 20(2) of the SG Act
defines when a defined benefit fund is in surplus.
This provision prevents employees in these circumstances having
additional superannuation contributions made on their behalf to
another fund.
where the employee is a member of an
employer s defined benefit fund and is entitled to their maximum
benefit from that fund (proposed subsection 32NA(8) of the SG
Act)
If a member of a defined benefit fund s superannuation benefit
will not increase other than by:
-
increases in salary
-
investment earnings
-
indexation according to a price index, or
-
in other ways prescribed for the purposes of this
paragraph.
then for Choice purposes they have achieved their maximum
benefit (see subsection 20(3) SG Act).
For example, a person who has been a member of the Commonwealth
Superannuation Scheme (CSS) for 40 years will not increase their
benefits other than by an increase in wages and/or investment
earnings. Further time spent working for the Commonwealth will not
increase their benefits.
Again, this provision prevents the additional payment of
superannuation contributions to another superannuation fund in
these circumstances.
where a defined benefit fund member was
entitled to a benefit whether or not SG contributions were made on
their behalf to that defined benefit scheme.
This provision, again, prevents contributions being made on the
behalf of an employee when the employer is already funding their
superannuation benefits through a defined benefit arrangement. It
prevents the potential double payment of superannuation benefits by
employers.
The above exclusions from providing a Choice form largely
clarify the exclusions that already existed in the SG Act.
ASIC to Enforce Particular Sections of the SIS
Act
Items 12 to 14 of Schedule 1 amend the
Superannuation Industry (Supervision) Act 1993 (SIS Act)
so that the responsibility for enforcing section 68A of that Act
rests with the Australian Securities and Investments Commission
(ASIC). Currently the Australian Prudential Regulation Authority
has responsibility for this particular section of the SIS Act.
Section 68A of the SIS Act prohibits superannuation fund
trustees from supplying goods or services to an employer or other
person on condition that one or more employees of that person
become members of that superannuation fund.(11) ASIC has
been quite active in the prosecution of financial and securities
offences.
Items 1 and 2 of Schedule 2 amend the
Retirement Savings Account Act 1997. The proposed changes
allow for the supply of some goods and services to employers or
others allowed in regulations. These provisions are similar to
those already existing in subsection 68A(4) of the SIS Act.
Concluding Comments
The response to the Choice regime is the most important issue
currently facing the superannuation industry.
The major issue arising from the proposed amendments is the use
of RSAs. As previously noted, generally small amounts will flow
into RSAs as a result of the closure of SHASA. If the rate of
return of these accounts is only about 2.95 per cent, and the cost
of operating that account is 2.3 per cent a year, after inflation
is considered, the value of these accounts in real terms will
decline over time.
The Government has also indicated that it would amend the Choice
legislation to extend the Choice regime to persons employed under
State Industrial Awards from 1 July 2006.(12)
-
Section 32F Superannuation Guarantee (Administration) Act
1992.
-
Section 32C Superannuation Guarantee (Administration) Act
1992.
-
The Hon. Mal Brough MP, Minister for Revenue and Assistant
Treasurer, Superannuation Choice A Smooth Transition for
Business and Employees, Press Release, No 003,19 January 2005
at
http://assistant.treasurer.gov.au/mtb/content/pressreleases/2005/003.asp
accessed 30 May 2005 and, Full Steam Ahead to Super Choice on 1
July, Press Release, No 16 of 14 March 2005 at
http://assistant.treasurer.gov.au/mtb/content/pressreleases/2005/016.asp
accessed 30 May 2005.
-
The Hon. Mal Brough MP, Minister for Revenue and Assistant
Treasurer, Second reading speech: Superannuation Legislation
Amendment (Choice of Superannuation Fund) Bill 2005, House of
Representatives , Debates, 26 May 2005, p. 10.
-
RiceWalker Actuaries, Superannuation Fees and Expenses -
Market Segment Analysis, March 2005, p. 5.
-
Australian Taxation Office, Fact Sheet, Retirement savings
accounts and your superannuation, 2 July 2004 at
http://www.ato.gov.au/super/content.asp?doc=/content/19138.htm&page=7&H7
accessed 30 May 2005.
-
Commonwealth Bank RSA Standard Rate Component for RSA, effective
11 March 2005 at
http://www.commbank.com.au/personal/other/rates_and_fees/investment.asp#RetirementSavingsAccountRates
accessed 30 May 2005.
-
Subsection 19(2E) Superannuation Guarantee (Administration)
Act 1992.
-
However, the following notes were found on the ATO s SuperChoice
website. During this period, an employer who demonstrates they have
made a genuine effort to comply with the choice requirements will
generally have any choice shortfall reduced to nil. However,
penalties will not be reduced where the employer has not made any
attempt to comply with the requirements of the law. These decisions
will be made on a case-by-case basis. At http://www.superchoice.gov.au/employers/penalties/
accessed 30 May 2005.
-
Generally, a defined benefit fund is one where the member s
final benefit is calculated with reference to a combination of
their length of service, final salary, or both, or some other way
not related to contributions and their associated investment
earnings.
-
Some narrow exemptions to the provisions to section 68A SIS Act
have already been made, see Superannuation Industry (Supervision)
Amendment Regulations 2005 (No. 1) at
http://www.frli.gov.au/ComLaw/Legislation/LegislativeInstrument1.nsf/0/EA9CCE1EA0DF6316CA256FC3007E7394/$file/0413043B-050307EV.pdf
accessed 30 May 2005.
-
The Hon. Mal Brough MP, Minister for Revenue and Assistant
Treasurer, Full Steam Ahead to Super Choice on 1 July,
Press Release, No 16, 14 March 2005 at
http://assistant.treasurer.gov.au/mtb/content/pressreleases/2005/016.asp
accessed 30 May 2005.
Leslie Nielson
31 May 2005
Bills Digest Service
Information and Research Services
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production. The views expressed do not reflect an official position
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ISSN 1328-8091
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