ARISA Supplementary Submission to the Senate Economics
Legislation Committee (“the committee”)
Inquiry into Superannuation Legislation Amendment Bill (No.
3) 1999 – (“SLAB3”)
ARISA makes the following comments regarding SLAB3 as a result of the
public hearing conducted by the Committee on 27th May 1999.
We have also taken the opportunity to raise some new issues regarding
SLAB3 that have come to our attention:
1) We understand from Government that the self-managed superannuation
fund (SMSF) definition has been created because of concern that there
is little protection for arm's length members in excluded funds. However
we wish to point out that under the current Section 18A of the SIS Act,
a fund will be a public offer superannuation fund (POSF) unless
certain criteria has been met. Under the SIS Act, POSFs have much stricter
operational requirements than non-POSFs. In ARISA's view this provision
is particularly powerful. Section 18A does allow standard employer
sponsored members (as defined under the SIS Act) who are arm's length
employees of a sponsoring employer to be members of a fund without the
fund being a POSF. In ARISA's view the Government could achieve its policy
objectives by simply amending Section 18A to require any fund that has
arm's length members to be a POSF.
At the Senate Economics Legislation Committee public hearing in late May,
one industry group noted their disagreement with amendments proposed by
SLAB3 that would disallow “friends” from being members of a
SMSF. Under ARISA's proposals, such a fund would be a POSF both now and
in the future.
ARISA's proposal therefore provides flexibility while ensuring adequate
prudential supervision.
2) Only 4 members in SMSFs
We have seen estimates that say there is currently an average of 1 - 2
members in each small fund. We agree that SMSFs must not be allowed to
have so many trustees/members that trustee decision making becomes difficult.
However the maximum number of 4 appears to have been chosen merely because
this number was already in the legislation. With a maximum number of 4
members a husband and wife with 3 or more children would either need to
operate 2 SMSFs or operate a fund regulated by APRA.
We believe that the legislation needs to be practical and must also cater
for the future. For this reason we believe that a maximum number of 7
members would cater for most family and business relationships, while
at the same time ensuring that all members/trustees are able to protect
their own interests by being involved in the decision making process.
As an example assume that upon the death of the husband, he would like
his SMSF to pay pensions to his wife and their 4 children. Under SLAB3
this would be impossible as all pensioners must be trustees and the maximum
number of trustees/members is 4. If the couple didn't want to operate
a fund regulated by APRA or join a large public offer superannuation fund
then their only option is to set up two SMSFs. This is unnecessary expense.
If the maximum number of members were changed to 7, then consequential
changes would need to be made to the current draft legislation dealing
with super fund investment standards - currently titled Superannuation
Legislation Amendment Bill (No.4) 1999.
3) Capital Gains Tax
SLAB3 will force some members of small funds to leave their current fund
- especially where all members don't satisfy the new "linked"
requirement.
This situation can occur leading up to 31st March 2000 where “non
linked” employees of an employer sponsor are members of a SMSF. This
situation can also occur after 31st March 2000 where business relationships
change.
When a member leaves a fund, his/her benefits are transferred to another
fund. In order to transfer the benefits the transferor trustee will be
disposing of assets and hence this will either trigger CGT or even crystallise
a capital loss.
The key issue here is that the disposal of assets (and any consequential
tax that arises from this) is mandated by legislation.
(There is a CGT exemption in the current tax law for superannuation funds
that are amending their deeds to comply with the SIS Act. Many funds will
make use of this provision as part of the SLAB3 changes. However clearly
this exemption doesn't go far enough.)
We strongly request that an appropriate CGT exemption be provided.
4) Pensions
While we are on the subject of forced change due to SLAB3, in some situations
those who are currently receiving pensions will need to leave their fund.
For example, under the current provisions of the SIS Act it is possible
to have a pensioner beneficiary (that is someone who is receiving
a pension from the fund yet isn't a member). Whether or not a fund can
do this depends on the wording of the fund's trust deed. This provision
has been particularly helpful, as it has allowed retirees to still be
part of a fund while still allowing four other individuals to be members
of the same fund.
Under the SLAB3 amendments, pensioner beneficiaries will now become members
of the fund and consequently some funds will now have more than 4 members.
If the trustees want the fund to be a SMSF then one person must leave
the fund.
If it is the pensioner, then upon transfer to another fund to continue
to receive pension payments, the pensioner's annual tax-free amount will
be re-calculated. In some situations this will lead to a tax penalty.
Further as some of the assets backing the pension are likely to be Government
securities, there are likely to be penalties on realising these assets.
ARISA would like this particular issue to be addressed. We admit that
the Government has sought to address this situation by allowing a retiring
business partner to remain a member of a super fund. However as we have
identified above this concession doesn't go far enough.
If a non-pensioner must leave the fund then we again confront the issues
we have raised in point 3 above.
5) Stamp Duty
We note from a letter by the Prime Minister to the leader of the Australian
Democrats dated 28th May 1999, that it is proposed that the abolition
of business stamp duties would be deferred indefinitely.
Upon disposal of assets to pay a benefit to another fund, stamp duty may
be payable. This means that where a member must leave a fund because of
the SLAB3 amendments stamp duty may be payable for the foreseeable future.
We strongly request that an exemption from Stamp Duty be sought so that
a trustee can comply with Federal Government's policy contained in SLAB3.
6) Non-resident super funds
Under current tax law, if more than 50% of the accumulated entitlements
of active members [1] are for
the benefit of non-residents (for tax purposes) then that fund will be
a non-resident non-complying superannuation fund (NRNCSF). A super
fund can also be a NRNCSF where the central management and control
of the fund is no longer in Australia.
In the first year a fund becomes a NRNCSF, Section 288A of the Income
Tax Assessment Act 1936 (ITAA36) will tax the fund's assets (less
undeducted contributions) [2] and taxable income at 47%.
As SLAB3 requires all members to be trustees – or directors of a
corporate trustee - then we consider that any fund with expatriates will
have a very real chance of failing to comply with these requirements.
As you will note the tax penalties when this occurs are very large.
It is true that under the current wording of the SIS Act and the ITAA36
law this can occur.
One way of managing the central management and control issue (under
the pre and post SLAB3 amendments being enacted) would be for an approved
trustee to be appointed to the fund. This is an unsatisfactory solution.
Further this doesn't fully solve the problem. For example, where a fund
contains two people (let's say husband and wife) who are both non-residents
and both want to make contributions to the fund. In this circumstance
the fund would fail the active member test and hence hefty tax
penalties would apply.
We consider that the law in this regard needs amendment and SLAB3 is
a good opportunity to do this. One possibility would be to allow a period
of time before the NRNCSF rules applied (we suggest a 6 year time limit
– this time limit is used before CGT applies on the family home).
7) Control issues and penalties
ARISA believes that many of the penalties proposed in SLAB3 exceed
the severity of the breach. For example, under SLAB3 it's possible for
a person to be put in jail for 6 months for not ceasing, within the required
time, their membership/trusteeship of his/her fund when the "linkage"
test has been broken (when for example two business partners split up).
Under SLAB3, this particular penalty is a strict liability. This
means the penalty applies automatically. It is true that a Court
can remit this penalty to a monetary fine however there is no guarantee
that this would occur.
On death a member's legal personal representative (LPR) steps in as
trustee for that member until a benefit has been paid from the SMSF. This
is not flexible enough. The LPR should be allowed to remain as trustee
until the deceased's benefit has been fully paid out of the fund.
For example, if the trustee needs to make a small lump sum death benefit
(relative to the whole benefit to be paid as a result of death) to pay
burial expenses then the LPR would have to resign as soon as the small
benefit had been paid. This means that the LPR would not be at trustee
meetings to ensure that the deceased member's remaining benefit would
be dealt with as the deceased had wished.
Under SLAB3, a person can appoint a power of attorney (POA) to act
as his/her trustee. However POA is established under State law, whereas
corporations are established under Commonwealth law and don't recognise
the State POA provisions. This means that this provision will not work
in practice where a fund has a corporate trustee.
SLAB3 will not allow a disqualified person (defined in Part
15 of the SIS Act) to be a trustee of a SMSF. The disqualified person
test is very harsh and needs to be limited for SMSF purposes especially
as all members are now to be linked.
8) Moving from a SMSF to non-SMSF and vice versa
There are no details in the SLAB3 amendments that detail the processes
when a SMSF ceases to be a SMSF, or when a fund regulated by APRA becomes
a SMSF. Section 106A provides that a trustee must inform the Commissioner
of Taxation if the fund ceased to be a SMSF within 21 days of first having
knowledge of the change in status. Will further details be provided in
regulations?
Footnotes
[1] That is, the member or his/her employer
is currently making contributions to the fund for the member.
[2] As at the end of the previous financial
year