Bills Digest No. 112   1997-98 Superannuation Industry (Supervision) Amendment Bill 1997

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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.


Passage History

Superannuation Industry (Supervision) Amendment Bill 1997

Date Introduced: 1 October 1997
House: House of Representatives
Portfolio: Treasury
Commencement: 1 July 1996


To introduce rules that will allow retrospective approval of a superannuation fund as a 'complying fund' when certain procedural matters have not been successfully complied with but the substantive regulatory rules have been met.


The Superannuation Industry (Supervision) Act 1993 (SIS) contains a number of rules relating to the operation of superannuation funds, such as rules relating to equal representation for employers and members in employer sponsored funds; rules restricting the in-house use of assets; standards for trustees, custodians and investment managers; the accounting requirements of funds; and the disclosure of information by funds that offer membership to the public. SIS can be regarded as a substantial regulatory regime that imposes a large range of duties and responsibilities on the trustees and other officials responsible for the management of superannuation funds. While the degree of regulation is substantial, it is designed to protect the interests of superannuation funds, which may be considered to be especially necessary when contributions to superannuation by employees is compulsory under the Superannuation Guarantee scheme.

The need for compliance with SIS for non-exempt funds (basically those with more than five members) is paramount to the fund being able to claim concessional tax treatment. Funds that comply with SIS (known as complying funds) are able to receive the concessional tax rate of 15% on certain components of their income. The principal components of income that will be taxable are undeducted contributions and earnings of the fund. If SIS is not complied with the concessional rate will not be available and the relevant tax rate will apply to the fund. As most funds are incorporated bodies, the rate of tax will generally be that applicable to companies (currently 36%). In other cases the rate of tax applicable to trustees will apply, which is the same as the personal rates of tax, with a maximum rate of 47% plus, in certain circumstances, the Medicare levy.

While the concessional tax treatment is applied to the fund, the principal beneficiaries of the concession are the members of the fund. As the fund pays less tax it has more funds to invest which will, assuming reasonable returns, increase the amount of funds to be distributed to members (such reasoning does not apply to defined benefit funds where the final benefit available does not depend on the earnings of the fund but allows such funds to minimise the ultimate cost of providing the defined benefits if the fund is funded). If there is a breach of the SIS rules and the fund therefore loses its complying status, the principal losers will be the members of the fund, rather than the trustee or other person whose actions or inactions resulted in the breach of SIS.

Due to the potential effects on members of a fund losing its complying status, the Insurance and Superannuation Commission (ISC) has not withdrawn complying status for breaches of the procedural, rather than substantive, SIS rules. This was achieved by the use of the transitional provision contained in section 333 of SIS which allowed the ISC to declare that a temporarily modifiable provision would operate as varied by the ISC. The section provides that declarations modifying a provision would have no effect after 30 June 1996. The provisions of the SIS Act that could be modified covered not only procedural matters but also many of the substantive provisions of the SIS regime. The ability to modify the application of certain provisions was designed to allow a settling-in period for funds to become fully acquainted with the SIS rules.

The reason for the amendments contained in this Bill is stated in the Second Reading Speech to be that now that the ability to modify the temporarily modifiable provisions has lapsed superannuation funds may lose their concessional treatment for breaches of procedural requirements rather than a substantive provision which applies a duty or obligation on an official of a fund. There are also provisions of the SIS Act that can be modified by the ISC at any time, but these address a considerably smaller number of matters than the temporarily modifiable provisions and do not include many procedural matters.

The Bill is proposed to act retrospectively to enable the ISC to modify provisions for the 1996-97 financial year and later years and to enable the proposed provisions to operate from the time that the current power to temporarily modify provisions expired. The matters that may be validated under the Bill are significantly narrower than the those contained in the temporality modifiable provisions and principally relate to procedural issues.

Main Provisions

Section 42 of the SIS Act deals with when a fund will be treated as a complying fund. Item 2 of Schedule 1 of the Bill will insert new subsections into section 42 of the SIS Act.

Proposed subsection 42(1AA) provides that a fund is to be treated as a complying fund for 1994-95 and later years of income where:

  • the fund came into existence during the taxation year or was an approved deposit fund (ADF) that became a superannuation fund during the year;
  • the fund had a trustee who elected to be treated under the SIS Act and these matters occurred during the allowable time;
  • either the trustee did not breach the SIS rules before the election was completed or, if the rules were breached, the ISC is satisfied that there were special circumstances that make it reasonable for the fund to be treated as having complied; and
  • the fund was a resident, complying fund for the period after the election was completed to the end of the year.

A fund will also be taken to be a complying fund if it has taken the necessary steps to apply to be so treated; the steps were defective and within 28 days (or such longer period as allowed) of finding out that the steps were defective the necessary rectification was made; the ISC is notified of the rectification;either the trustee did not breach the SIS rules before the election was completed or, if the rules were breached, the ISC is satisfied that there were special circumstances that make it reasonable for the fund to be treated as having complied; and the fund was a resident, complying fund for the period after the election was completed to the end of the year.

Further, if an application for treatment as a complying fund has been delayed, the fund has satisfied the ISC that proposed subsection 50(1) should apply and the reason for the delay is a reason contained in the regulations, the fund is to be treated as a complying fund (item 3).

Also, if a fund is wound up prior to gaining approval as a complying fund; has notified the ISC of the intention to wind-up the fund; has notified members of the winding-up in accordance with the SIS rules and has under the regulations the fund is to be treated as a transitional fund during the period; then the fund is to be treated as a complying fund for the year.

Contact Officer and Copyright Details

Chris Field
20 November 1997
Bills Digest Service
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ISSN 1328-8091
© Commonwealth of Australia 1997

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Published by the Department of the Parliamentary Library, 1997.

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Last updated: 21 November 1997

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