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| Fund Type | Funds(1) | Members (000's) |
Assets ($ billion) |
|---|---|---|---|
| Corporate | 4 259 | 1 456 | 69 |
| Industry | 108 | 5 847 | 26 |
| Public Sector | 62 | 2 878 | 84 |
| Retail | 363 | 8 957 | 102 |
| Excluded | 169 825 | 348 | 47 |
| Annuities, life office reserves, etc. | na | na | 49 |
| Total | 174 617 | 19 486 | 377 |
(1) Fund numbers are preliminary only for June 1998
Source: APRA, Superannuation Trends - December 1998
This Bill deals with excluded funds that have the principal characteristic of being restricted to fewer than 5 members, which explains the relative small number of total members compared to the large number of funds shown above.
The funds are known as excluded funds as they do not have to comply with all of the regulatory requirements imposed by the Superannuation Industry (Supervision) Act 1993 (SIS) and regulations to receive their complying status and hence concessional taxation. Examples of differences between excluded and other regulated funds are that the trustee/s of an excluded fund do not need APRA's approval, the acquisition of property from members is more relaxed for excluded funds, information and reporting requirements are less for excluded funds and other investment rules are less restricted than for other funds. The lower prudential requirements reflect the risk borne with excluded funds, which is based on the restricted number of members having a greater opportunity to possess knowledge of the funds operations. Such funds are also known as D.I.Y. super funds because, as the term implies, the members of the fund can take an active role in the decision making of the fund, although the final decision may rest with the trustee/s.
The appropriateness of lower prudential standards for excluded funds can be questioned when the relationship between the trustee and members of the fund become such that there is no ability for the member to affect the trustee so that the member is in much the same situation (except relating to regulatory controls) as a member of a larger fund.
Superannuation in general, and the position of excluded funds, was examined by the Financial System Inquiry which reported in March 1997 (Wallis Report). The Report considered excluded funds to 'provide a worthwhile and competitive option' but as self-managed funds should not be subject to prudential regulation. It recommended that supervision of excluded funds be transferred to the Australian Taxation Office (ATO) as the body which has the responsibility of determining if the funds is a complying fund or not.(2) The Wallis Report also commented:
At present, some excluded funds have beneficiaries who are at arm's length from the trustees. This is unsatisfactory to the extent that there is little protection of the interests of these third-party beneficiaries and because there is little practical scope for effective prudential regulation of such funds. The Inquiry considers that funds which have third-party beneficiaries should not be regarded as excluded funds. On balance the Committee would prefer to discourage this particular configuration of superannuation structure.
The Committee believes that there is an opportunity to improve the prudence and compliance of excluded funds by requiring all beneficiaries of such funds to be trustees.(3)
Changes to the regulation of excluded funds were announced in the 1998-99 Budget. The main changes relate to:
In the event of an existing excluded fund not falling within the new definition, the fund must either restructure to meet the new member/trustee requirements or appoint an independent trustee and be subject to regulation by APRA.(4)
While the later choice, with an independent trustee and APRA supervision, can be achieved with relatively minor changes, the effect on the operation of the fund may be quite significant, particularly the need for investment 'approval' from the trustee (the trustee will generally be making the investment decisions). This may become particularly relevant where the members of the fund wish to invest in a limited number of 'ethical investments' unless the trust deed is amended to reduce investment to a limited range of areas. The requirement for there to be a certain relationship between all members of a self managed fund may also create problems for existing excluded funds which have same sex partners as members of the trust (see the comments section below).
Changes to the investment rules that will effect self managed funds were also announced in the 1998-99 Budget but have yet to be introduced into Parliament. The proposed new rules were released in an exposure draft of the Superannuation Laws Amendment Bill (No. 4) 1999 and these proposals have been subject to further change following consultation on the draft Bill.
Amendments to the SIS Act (Schedule 1 of the Bill)
Self managed superannuation funds (SMF) are defined in proposed section 17A of SIS. A fund with more than one member will be a SMF were:
Members of a fund will be taken to be linked where there is a sufficiently close relationship between the people involved. This will be where:
For the first three cases listed above, if a person had a sufficient link due to their position as a director, trustee or partner before retiring, this will be a sufficient relationship (ie. after a person with a sufficient relationship retires they will remain eligible to be a member of the SMF and so receive benefits from it).
'Relative' is defined in proposed section 17A to include a spouse or former spouse as well as blood relatives. Spouse is defined in SIS to be married people or people who are not married but who live on a genuine domestic basis as the husband or wife of the other person. This will exclude members of a same sex relationship from falling within the definition of spouse, and hence of relative for proposed section 17A.
Where the fund has only one member, it will be a SMF if:
Where the above conditions are satisfied, other people may still be trustees in certain circumstances and the fund will retain its SMF status. The circumstances when this will be allowed are when a legal personal representative has replaced a member due to the member's death or legal disability (in such circumstances, there will be a limit on the period for which the legal personal representative may act), and where an acting trustee is appointed by APRA (or the appropriate administrator of the fund. This will be achieved by later amendments in the Bill which changes references to APRA to the Regulator. In practice, if the administration of SMFs passes to the ATO, it will be this regulator taking action). However, a person under a disability that prevents them from being a trustee for other reasons will not be able to take advantage of these provisions to act as a trustee.
A person is not to be a trustee of a fund with less than 5 members, other than a SMF, unless the trustee is approved by APRA and APRA may suspend a trustee of such a trust unless they are approved (items 28 and 29). (The power to suspend an unapproved trustee will commence from 1 April 2000 - subclause 2(2)).
A trustee of a SMF will not be required to lodge a return with APRA (item 31), but instead will be required to lodge a return with the ATO (item 32).
Section 42 of SIS deals with when a fund will be treated as a complying fund. The section will be amended by items 33 to 37 to remove SMFs from the ambit of the section. A new section 42A, which deals with when a SMF will be a complying fund, will be inserted into SIS by item 38. If the SMF is a resident regulated fund for the whole of the year or during the part of the year when it was not a resident regulated fund it was a resident approved deposit fund, the SMF must satisfy the general test contained in proposed subsection 42A(5), which will be achieved if:
If the entity was a SMF for only part of the year and complied with the above requirements while it was a SMF, the fund will be a complying fund so long as the trustee did not fail the culpability test during the period when the fund was not a SMF (the culpability test is satisfied if the person was directly or indirectly involved in a contravention of SIS or its regulations). If the fund came into existence during the year, it must satisfy a similar test for the period during which it was a SMF and also comply with requirements relating to the period before lodgement for treatment as a regulated fund. The proposed section also contains provisions relating to compliance where a trustee elects to be treated as a regulated fund during the year.
Where a fund has fewer than 5 members and is not a SMF, it must have an approved trustee (item 49) and it will be an offence, with a maximum penalty of 6 months imprisonment, for a person to act as a trustee without approval (The offence will be one of strict liability so that there will be no need to prove intent or negligence.) (item 50). (The offence will commence on 1 July 2000 - subclause 2(3)).
For SMFs, the ATO will have general administration of SIS and its regulations that are relevant to SMFs (eg. annual returns, complying status, duties of trustees and investment managers and accounts and statements) (item 10).
Item 56 will insert a new Part 24B, dealing with the administration of funds with fewer than 5 members by APRA and the ATO. More important provisions relate to:
The Superannuation (Excluded Funds) Supervisory Levy Imposition Act 1991 will be amended by items 7 to 12 of Schedule 2 of the Bill to reduce the maximum supervisory levy for SMFs to a maximum of $200 per year and the late lodgement penalty for returns to a maximum of $25.
As noted above, the amendments are likely to have an effect on current excluded funds that have as a member a person who is a member of a same sex couple. Currently, SIS and its regulations are not concerned with the status of the relationship of members of an excluded fund and it is possible to organise an excluded fund so that the benefits can be directed to a person who is a member of a same sex couple. Under the proposed rules where members of the fund must be relatives or have another sufficient link, it will be necessary to alter the trust so that it ceases to be a SMF and becomes a 'standard' regulated fund, so that the trustee is approved and stricter control by APRA, rather than the ATO, will apply. While this may be a relatively minor matter, it is a further and new example of the problems caused to same sex couples by the definition of spouse contained in SIS.
An alternative to the requirement that all the members of the fund be linked is found in the passage from the Wallis Report quoted above, which recommended that all beneficiaries of such funds be trustees. While the Bill implements this recommendation, so that all members of the fund are required to be trustees, it adds the further requirement that they be linked. The later requirement appears not to be based on the Wallis Report recommendations.
Chris Field
26 May 1999
Bills Digest Service
Information and Research Services
This paper has been prepared for general distribution to Senators and Members of the Australian Parliament. While great care is taken to ensure that the paper is accurate and balanced, the paper is written using information publicly available at the time of production. The views expressed are those of the author and should not be attributed to the Information and Research Services (IRS). Advice on legislation or legal policy issues contained in this paper is provided for use in parliamentary debate and for related parliamentary purposes. This paper is not professional legal opinion. Readers are reminded that the paper is not an official parliamentary or Australian government document.
ISSN 1328-8091
© Commonwealth of Australia 1999
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Published by the Department of the Parliamentary Library, 1999.
