Executive Summary
The Association of Superannuation Funds of Australia (ASFA) welcomes
the opportunity presented by the Senate Economics Committee to comment
on the Superannuation Legislation Amendment Bill (No. 3) 1999.
ASFA has made submissions and held discussions with government officials
on the exposure legislation that was circulated and notes that the Bill
as presented to Parliament reflects that significant progress has been
made on several issues.
However, ASFA considers that the following matters are still in need
of further consideration:
- The absence of Capital Gains Tax rollover relief for funds which will
be required to alter their trustee arrangements to comply with the proposed
legislation.
- The lack of flexibility in the maximum number of fund members a self
managed fund, or a superannuation fund with fewer than five members,
may have at a given point in time.
- The application of a continuance test in relation to fund membership
is overly prescriptive and does not reflect the proposition that the
member/trustee requirement enables each member to look after their own
interests.
- The safeguarding of the interest of members who are admitted to a
fund while under a legal disability.
- The unintended consequences flowing from the limited definition of
linked.
- The lack of a reference to same sex partners in the definition of
relative.
- The requirement, under certain circumstances, to lodge returns with
two regulators for the same year.
- The practical restriction on a `superannuation fund with fewer than
five members' to direct their approved trustee on investment issues.
- The length of the transition period.
BACKGROUND
ASFA is a non-profit, non-party political national organisation whose
mission is to protect, promote and advance the interests of Australia's
superannuation funds, their trustees and their members. As such it is
the “Voice of Super”.
ASFA's 582 constituent members have been estimated to be responsible
for around $300 billion of assets, about 80 per cent of the total superannuation
funds under management of around $377 billion as at December 1998. ASFA
member funds in aggregate also represent around 6.5 million Australians
with superannuation. This amounts to the bulk of the working age population
and around 80 per cent of Australians with superannuation.
ASFA's membership is largely drawn from medium to large superannuation
funds, but its membership also includes service providers to small, self-managed
superannuation funds. These service providers include leading firms of
accountants and lawyers with particular expertise in the establishment
and ongoing running of both small and large superannuation funds.
In compiling this submission, ASFA is able to draw on the expertise and
practical experience of its members, its various policy committees and
study groups. The perspective is therefore of practitioners, as well as
wider retirement income and superannuation policy principles.
A priority for ASFA is that legislation and practices applying to self
managed funds (SMFs) remain consistent with and supportive of a sound
national retirement income policy. More generally ASFA is concerned
that superannuation receives the benefit of tax concessions because of
the role it plays in Australia's retirement income policy and in supplementing
the age pension and increasing self reliance in retirement. For these
reasons ASFA supports government policy of preservation. Other goals related
to the tax effectiveness of business operations must be regarded as secondary
to these objectives under which superannuation was first introduced and
supported by tax concessions. While the latter may be justified on public
policy grounds, any such assistance needs to be considered against the
primary objective of superannuation.
ASFA submits that there should be consistency in the legislation applying
to SMFs and larger funds. There should also be consistency in policies
and procedures adopted by the Australian Taxation Office (ATO) and APRA
in their dealings with superannuation funds. The need for such consistency
is justified on the grounds of providing adequate and sustainable retirement
income strategies. It is also justified on the basis that there will be
movement of funds from time to time between the categories of SMFs and
funds regulated by APRA. Consistency is needed in both how funds are constituted
and behave, and how the ATO and APRA perform their regulatory responsibilities.
Specifically, ASFA's comments focus on issues surrounding the definition
of a self managed fund in the Bill, and the effects that a change in trustee
and a change in membership linkages would have on these funds given this
definition.
ASFA foresees unintended consequences flowing from the application of
a continuance test in relation to the membership of self managed funds.
We propose a change to the continuance test which effectively leaves in
the hands of the members of these self managing funds the appropriateness
of allowing a membership to continue once the initial entitlement to membership
has been established.
For simplicity and ease of reading the comments are listed under two
broad headings.
GENERAL COMMENTS covers general definitional issues and items not covered
by the legislation.
ITEMS WITHIN THE LEGISLATION contains comments on individual items in
the order in which they are listed in the Superannuation Legislation amendment
Bill (No. 3) 1999.
GENERAL COMMENTS
Definition of a self managed fund
ASFA supports the proposed changes in definition of an excluded fund
as they remove arms-length members, are linked to overall fee reduction
and do not adversely affect the majority of excluded funds.
ASFA's position is that there should be no non-associated members in
SMFs. The number of people in the fund and their relationship to each
other must be such that it is reasonable to assume they fully participate
in the running of the fund, including decision making on relevant matters.
ATO as a regulator
ASFA's preference would be for all superannuation funds to be handled
by one regulator. This is likely to promote a consistency of philosophy.
The movement of the regulation of SMFs to the ATO assumes that SMFs will
not require prudential supervision. We understand this is the essence
of the reasons underlying the recommendation of the Wallis Report that
responsibility for SMFs move to the ATO.
With the change in regulator and the change in excluded fund definition,
ASFA agrees that there should be a less extensive prudential and supervisory
regime for excluded funds. ASFA considers that any compliance activity
relevant to the self managed funds should be built around targeted, proactive
help and compliance incentives, rather than through any increased reporting
requirements or general scrutiny.
In addition to the matters of principle that were behind the Wallis Report
recommendation, there may be other practical reasons related to the supervision
of a large number of entities that led the Government to propose that
the ATO be the regulator. However, this change in regulators is only sustainable
if members of SMFs are capable of managing their own affairs.
Capital Gains Tax Rollover Relief
Within the legislation there is no provision for Capital Gains Tax (CGT)
rollover relief to be granted as a result of the transfer (disposal and
acquisition of an asset) of property from an existing trustee to the new
member trustees or to an approved trustee.
Typically, the trusteeship of an excluded superannuation fund rests with
either a representative number of members, or is placed in the hands of
an external administrator/adviser such as an accountant. As the ownership
of the funds assets resides with the trustee, a change of trustee to comply
with the new requirements will result in an acquisition and disposal of
the assets, triggering the CGT provisions of the Income Tax Assessment
Act. Exposure to stamp duty on these property transfers is also an issue.
ASFA considers that granting of CGT rollover relief is essential in the
situation where the transfer of ownership is required solely to
enable an existing excluded fund to meet the new legislative requirements.
The granting of the relief would be consistent with the relief the Government
has granted to institutions which are restructuring to meet the new Managed
Investments Act requirements.
The CGT relief should be available to any existing excluded fund moving
into either the Self Managed Funds or the APRA `regulated superannuation
fund with fewer than five members' regime.
A substantial case for CGT rollover relief also applies to where an existing
excluded fund is wound up and all assets / members are transferred to
a non-excluded fund, although this may pose some legislative problems.
While consideration should also be given to granting rollover relief
when an existing member's link with the fund is broken, ASFA believes
a more appropriate result could be achieved through an amendment to the
definition of linked and relative. Specific suggestions
on this are made below in the ASFA comments on detailed provisions of
the Bill.
Treatment of same sex partners
ASFA is disappointed that the Government, as part of an expansion of
its retirement incomes policy, has not taken the opportunity to make provision
for same sex partners within a self managed fund by including `same sex
partners' in the definition of relative.
ITEMS WITHIN THE BILL
Schedule 1 - Amendment of the Superannuation Industry (Supervision)
Act 1993 relating to self managed superannuation funds
Section 17A: Definition of self managed fund
While ASFA is supportive of the proposal to retain the maximum number
of members in this class of fund at 4, it believes that provisions should
be inserted in the legislation which would permit a self managed fund
to have more than four members for a period of time in certain restricted
circumstances.
Specifically, ASFA considers that where a member of a four member fund
dies, and this results in a pension being payable by the fund to two beneficiaries,
the fund should be permitted to retain its self managed fund status even
though the number of members would now be five. In these circumstances,
the legislation should merely restrict the fund from admitting a new member,
apart from a new beneficiary of an existing member of the fund, until
the fund membership dropped naturally to three members.
In more general terms, ASFA considers that, given the low numbers of
permissible members, an acceptable fund structure should not be suddenly
deemed unacceptable purely because of a change in external circumstances.
In many cases the situation will be resolved naturally by the member voluntarily
leaving the fund. However there will be situations where the affected
members wish to retain the status quo, or legal requirements (court orders,
wills etc) require the status quo to be maintained. In these situations
ASFA believes that it would be unduly harsh to require the fund to move
to an approved trustee arrangement.
For these reasons ASFA suggests that it may be more appropriate for the
membership test, currently proposed to be a continuous test, to be applied
at the time of initial membership only. If circumstances change at a later
time then the individual trustee can reconsider the appropriateness of
their remaining a member.
ASFA has concerns with the granting of initial membership of a self managed
fund to a person who is under a legal disability. The concern lies with
the level of power and responsibility given to members of these funds,
combined with fund's placement in regulatory regime with minimal prudential
supervision.
In the situation where the person's legal personal representative is
currently a member of the fund, ASFA questions how effectively the interests
of the member with the legal disability would be managed and safeguarded.
Although an extreme case, under the current proposal it would be possible
for a fund to be created with a parent and three minors (the member's
children) as members. In this situation the parent would, in effect, be
the sole trustee. ASFA sees difficulties arising when they reach their
majority. Will they be capable of taking on a trustee role; will they
be willing to take on a trustee role; and, will the existing trustee allow
and encourage them to take on an effective trustee role?
ASFA considers it may be a more prudent course of action to require people
under a legal disability, and minors in particular, to join a non-self
managed fund. On reaching their majority, a minor could then be offered
the opportunity to join the self managed fund, and to accept the associated
responsibilities.
Please note that ASFA has no issue with minors becoming members by virtue
of them being beneficiaries of an estate, or with existing fund members
being represented by a personal legal representative whilst they are under
a legal disability.
Subsection 17A(4)
To overcome the situation where a fund fails by a short period of time
to meet the six month deadline to overcome a breach of the membership
rules, it is suggested that a discretion be inserted to enable the regulator
to grant a further period of time, upon application by the fund, before
the fund is deemed to not comply with the definition of a self managed
fund.
Subsection 17A(6): Meaning of linked
To avoid the situation where a fund would fail the definition test because
an individual becomes a fund member as a relative pensioner beneficiary
of a deceased member, and they cannot establish a link to another member
of the fund, it is suggested that the definition of linked be extended.
The definition should include individuals who, on the day they became
(or the day immediately prior to them becoming) a pensioner beneficiary
by virtue of the death of a member, met the definition of relative in
paragraph 17A(7) with regard to the deceased member.
Subsection 17A(7): Meaning of relative
It is suggested that the definition of relative be extended to include
a “same sex partner” defined along the lines “in relation
to a person, includes another person of the same sex who, although not
legally married to the person, lives with the person on a genuine domestic
basis, in a “husband and wife” type relationship.”
Items 31 and 32: Lodgment of annual returns
The Bill proposes that a superannuation entity which is not a self managed
fund at all times during the year must lodge an annual return with
APRA, and that a superannuation fund which is a self managed fund at
any time during the year must lodge an annual return with the ATO.
By implication, a superannuation fund which is self managed fund for
part of the year and APRA regulated for the remainder must lodge a return
with both regulators.
This raises the following issues which need clarification:
1) For what period of the Income Tax year should the fund return and
accounts be prepared in respect of each regulator, and
2) What levy is payable to each regulator.
From a fund administration perspective ASFA would prefer that the requirement
is for a single return be lodged with its regulator as at the end of the
financial year. ASFA requests that the Bill be amended to clarify both
of these matters and to ensure that superannuation entities are not required
to undertake complicated administrative processes to meet the differing
requirements of the regulators or to pay full levies to both regulators.
Item 39
Whilst the Bill proposes that members of a `superannuation fund with
fewer than five members' be permitted to direct their approved trustee
on investment issues, it does not give the members an indisputable power,
or the same level of control they are able to exert as an excluded fund.
ASFA sees some difficulties in the practical application of this provision
and believes that funds may experience difficulties in finding an approved
trustee that is willing to give them the discretion on investment issues
they currently enjoy.
Item 133
ASFA has some concerns with the transition period ending on 31
March 2000. Many funds are not required to lodge Income Tax returns until
15 March. Therefore many fund trustees will not become aware of the new
legislative requirements until as late as March 2000.
ASFA is aware that the Australian Prudential Regulating Authority is
currently considering a number of administrative arrangements to minimise
the possibility of a fund becoming non-complying and arms length members
being disadvantaged.
ASFA suggests that, as a first step, the transition period should
be extended beyond 31 March 2000, and an education strategy should
be implemented by the regulators to inform all excluded fund trustees
of what the new requirements are and what they must do to meet the new
requirements.
Schedule 2 - Consequential amendments to other Acts
Item 10
It is noted that in the Bill the amount of the Supervisory Levy for self
managed superannuation funds is capped at $200, the current minimum levy
payable by an excluded fund. In the Budget announcement of these changes,
prominence was given to the ATO administration being a cost saving measure
for the funds involved.
ASFA's strong suggestion is that the initial levy, to be specified in
the regulations, not exceed the $50 per annum figure mentioned in the
Treasurer's Budget announcement of these changes.