Numerical Index | Alphabetical Index

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 and Copyright Details

Passage History

Superannuation Legislation Amendment Bill (No. 3) 1999

Date Introduced: 31 March 1999

House: House of Representatives

Portfolio: Treasury

Commencement: 1 July 1999, unless otherwise mentioned in the Main Provisions section.

 

Purpose

To replace 'excluded funds', which have less than 5 members, with a new category of self managed funds which will have tighter membership rules and their regulation administered by the Australian Taxation Office

 

Background

The rapid growth of superannuation over the past two decades has a number of causes, such as: changes to Federal industrial awards to provide for employer contributions; the widening of occupational superannuation through the introduction of the superannuation guarantee scheme; and a growing awareness, both within the public and government, that a desired lifestyle in retirement will generally not be available solely on an aged pension and that taxpayers will find it increasingly difficult to finance the aged pension, particularly through the years when the 'baby boomer' generation reaches retirement age. The attractiveness of superannuation as a savings vehicle for retirement is principally the concessional taxation treatment of complying superannuation funds, which are subject to a 15% tax rate on member contributions and earnings. While superannuation coverage is very high for employees (91%) and all workers (81%), largely due to the compulsory superannuation guarantee scheme, coverage is substantially less for employers (36%).(1) This may be due to employers having other, preferred savings vehicles, such as investment in a business.

Superannuation funds may be classified as falling within a number of categories depending largely on to whom they are offered, who is eligible to be a member of the fund and the number of members of the fund. The differing types of funds may be subject to differing regulatory requirements. The following table gives a list of the number of funds, membership and assets of various categories of funds for December 1998:

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:

Changes to the regulation of excluded funds were announced in the 1998-99 Budget. The main changes relate to:

• introducing a category of self managed funds which will replace excluded funds, with the new name reflecting the investment management of the fund
• a self managing fund will be one with fewer than 5 members (as with excluded funds) where:
• all members are trustees and there are no other trustees of the fund, and
• if there is more than one member of the fund, all fund members are either [business] partners, directors or trustee of the employer-sponsor or family relatives.
• transferring responsibility for the management of self managed funds from APRA to the ATO.

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.

 

Main Provisions

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:

• it has less than 5 members
• each trustee is a member of the fund or, if the trustee is a company, each director of the company is a member
• each member of the fund is a trustee or, where the trustee is a company, a director of the company
• each member of the fund is linked to all other members of the fund, and
• no trustee receives remuneration for there services as trustee.

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:

• the people are directors of the same company, trustees of the same trust or partners in the same partnership and the company, trust or partnership carries on business
• they are directors in different companies and the companies are partners in a partnership that carries on business
• the people are directors of a company which operates a trust that conducts business
• the people are relatives, or
• the people are linked through a third party who has a sufficient relationship with those people.

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 trustee of the fund is a company, the person is the sole director of the company or is one of two linked directors (for when a director will be considered to be linked, see above), or
• in other cases, two individuals are trustees and one of the people is a member of the fund and the other is linked to the first person.

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:

• the trustee did not breach SIS or its regulations during the year, or
• there was such a breach but the regulator (ATO for SMFs), when considering the tax consequences on non-compliance, the seriousness of the breach and other relevant circumstances, considers that a notice of compliance should be issued.

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)).

 

Administration

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 ability of APRA and the ATO to require regarding the current or potential status of a fund as a SMF (proposed section 252A)
• specific secrecy provisions to protect information gained by the ATO in administering SMFs, and
• transitional provisions regarding the provision of information, lodging of returns and authorisation of instruments while SMFs change from APRA to the ATO.

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.

 

Concluding Comments

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.

 

Endnotes

2. Australian Prudential Regulation Authority, Superannuation Trends - December 1998, p. 6.

3. Financial System Inquiry Final Report, March 1997, p. 333.

4. Ibid., 334.

5. 1998-99 Budget Paper No. 2, p. 2-11.

 

Contact Officer and Copyright Details

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.

IRS staff are available to discuss the paper's contents with Senators and Members
and their staff but not with members of the public.

ISSN 1328-8091
© Commonwealth of Australia 1999

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Published by the Department of the Parliamentary Library, 1999.

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