Report
Background to the inquiry
The Superannuation Legislation Amendment Bill (No. 3) 1999 was introduced
into the House of Representatives on 31 March 1999. The Bill was referred
to this committee by the Selection of Bills Committee on 12 May 1999 [1] for examination and report by 22 June 1999.
In referring the Bill for inquiry, the Selection of Bills Committee requested
a detailed examination of the issues surrounding the changes to the regulations
of self managed superannuation funds.
The committee secretariat contacted a number of interested parties, and
received 16 submissions to the inquiry (Appendix 1 refers). A public hearing
on the Bill was conducted in Canberra on 27 May 1999. A list of witnesses
who gave evidence at the hearing appears in Appendix 2, and the full transcript
of the hearing is available at the internet address of .
Background to the Bill
The Second Reading speech and Explanatory Memorandum to the Superannuation
Legislation Amendment Bill (No.3) 1999 provides the following outline
and description of the regulatory objective of the Bill.
This Bill gives effect to the changes to the regulation of small superannuation
funds announced by the Government in the 1998-99 Budget. In this respect,
the Bill also reflects the Government's response to the recommendations
of the Financial Systems Inquiry (FSI) concerning the organisational framework
for the regulation of small superannuation funds.
The Financial Systems Inquiry found that under the present system there
is little protection of the interests of beneficiaries who are at arm's
length from the trustees in an excluded fund. In addition, that there
is little practical scope for effective prudential regulation of such
funds. As such, the inquiry concluded that excluded funds should not have
beneficiaries who are at arm's length from the trustees.
The Bill contains two schedules.
Schedule 1 Amendments of the Superannuation Industry (Supervision)
Act 1993 relating to self managed superannuation funds
Schedule 1 of the Bill amends the Superannuation Industry (Supervision)
Act 1993 (SIS Act) to establish a new category of small superannuation
fund with fewer than 5 members to be called a self managed superannuation
fund. It also provides for the transfer of the regulation of self managed
superannuation funds from the Australian Prudential Regulation Authority
(APRA) to the Australian Taxation Office (ATO) with effect from 1 July
1999.
The existing definition of an excluded superannuation fund will be replaced
with a new definition of a self-managed superannuation fund. In addition
to requiring the fund to have fewer than five members, the legislation
will also require all members of the fund to have a business or family
relationship and to be trustees of the fund. As members of self managed
superannuation funds will able to protect their own interests these funds
will be subject to a less onerous prudential regime under the SIS Act.
With this bill, the regulation of self managed superannuation funds will
be transferred to the Australian Taxation Office from 1 July 1999, while
regulation of all other funds will remain with the Australian Prudential
Regulation Authority. The ATO will have responsibility for ensuring that
self managed superannuation funds comply with the non-prudential requirements
of superannuation law and APRA will continue its more extensive role as
the prudential regulator of all other funds. Again, these changes have
been introduced by the Government in response to the recommendations of
the Financial Systems Inquiry.
A fund that has fewer than five members that is not a self managed superannuation
fund will continue to be subject to prudential supervision by APRA and
will be required to appoint an independent trustee approved under Part
2 of the SIS Act.
Part 1 of Schedule 1 includes amendments the to SIS Act to:
replace the existing definition of an `excluded fund' with a definition
of a `self managed superannuation fund';
confer powers and the administration of relevant Parts of the SIS Act
in respect of self managed superannuation funds on the Commissioner of
Taxation;
provide for an annual return to be lodged with the ATO for self managed
superannuation funds;
remove the application of the `culpability test' when determining whether
a self managed superannuation fund should be treated as a complying superannuation
fund for taxation purposes;
place a duty on a fund that changes regulators to notify the ATO;
require a fund that has fewer than five members (that is not a self
managed superannuation fund) to have an approved trustee;
enable APRA or the Commissioner of Taxation to give a notice to a fund
requesting certain information to determine whether the fund is a self
managed superannuation fund or an APRA regulated fund;
- a contravention notice prescribing a penalty will be able to be served
on a person who fails to comply with the notice within a specified period;
and
insert secrecy provisions to protect information and documents provided
to the ATO under the SIS Act.
Part 1 of Schedule 1 also inserts a number of transitional and savings
provisions relating to the regulation of self managed superannuation funds
by the ATO. These will ensure that when a fund changes regulators that
instruments issued by the previous regulator, and obligations owed by
or to the previous regulator will carry over to the new regulator.
Part 2 of Schedule 1 changes references to `APRA' to `the Regulator',
in order to facilitate the transfer of the regulation of self managed
superannuation funds to the ATO.
Part 3 of Schedule 1 inserts a number of transitional and savings provisions,
which will apply following the transfer of regulation of self, managed
superannuation funds to the ATO. These provisions allow:
a fund that has been a self managed superannuation fund for only part
of the 1999-2000 income year to submit an annual return for that year
to only one regulator;
existing excluded funds have until 31 March 2000 to adjust their structure
to meet the new definition of a self managed superannuation fund; and
the transfer of records relating to self managed superannuation funds
from APRA to the ATO.
Schedule 2 Consequential amendments of other Acts
Schedule 2 of the Bill implements consequential amendments to the Australian
Prudential Regulation Authority Act 1998, the Financial Institutions
Supervisory Levies Collection Act 1998, the Income Tax Assessment
Act 1936, the Superannuation (Excluded Funds) Taxation Act 1987,
the Superannuation (Excluded Funds) Supervisory Levy Imposition Act
1991, the Superannuation (Resolution of Complaints) Act 1993
and the Superannuation Supervisory Levy Imposition Act 1998.
The amendments give effect to the transfer of the regulation of self-managed
superannuation funds to the ATO. The amendments also provide for a reduced
supervisory levy to be payable by self managed superannuation funds.
The legislation provides for a reduced supervisory levy for self managed
funds. The new levy amount will be included in the Superannuation Industry
(Supervision) Regulation and will reflect to a larger degree the actual
cost of regulating such funds.
In conclusion, the fundamental goal of the Government in introducing
this bill is to ensure that the regulation of small superannuation funds
reflects the needs of members of such funds as well as the Government's
retirement income goals.
Financial Impact Statement
The financial impact of this Bill is considered to be low. Changes to
the superannuation supervisory levy are expect to have a Budget revenue
cost of around $19 million dollars in each of the financial years to 1999-00
to 2001-02.
Issues raised in evidence
According to current estimates there are approximately 180,000 excluded
funds. Of these 16% or about 30,000 have arms length members. The majority
of excluded funds consist of 1 to 2 members who maintain an active role
in their respective fund.
The number of excluded funds represents some $42 billion in assets under
management. These funds comprise 97% of the total number of superannuation
funds but represent only 12% of total assets and 1.8% of fund members.
[2]
Under this legislation members of excluded funds will have nine months
(until 31/3/2000) to determine if they wish to become a self-managed fund
regulated by the ATO, or appoint an approved trustee and be regulated
by APRA.
In the event that a self-managed fund suffers a change in circumstances
such as dissolving a business partnership or death it will fail the linkage
test as defined in the legislation. The members will have six months to
decide to either wind up the fund, appoint an approved trustee and be
regulated by APRA or appoint another trustee/member to reinstate the link.
Definition of Self-Managed Funds
A superannuation fund is a self-managed fund if it satisfies the following
criteria:
a) The fund must have fewer than five members
b) All members of the fund must be trustees and there be no other trustees
c) There must be a family or business link between each member of the
fund
The evidence before the committee questioned the rationale behind each
of the criteria, on the grounds of equity, efficiency and simplicity.
The results of a survey undertaken by the National Institute of Accountants
of its members raised a number of questions and concerns whether the change
in definition would assist small superannuation funds. Following is a
summary of the comments the NIA received back from its survey:
- creating a distinction between self managed funds (SMF) and non-self
managed funds reduces the flexibility for members to structure a superannuation
fund that best suit their needs;
- Allowing only family or business related persons to become members
of an SMF restricts the scope of SMF's too narrowly as it does not recognise
situations, such as divorced couples maintaining a superannuation fund
or an employee superannuation fund in a small business, that should
be recognised as having a close enough relationship to qualify as an
SMF.
- Why is it that arms-length people can not establish an SMF? Being
at arms-length and each member being a trustee may well lead to a more
prudent management of the fund rather than non-arms length people.
- By creating differing classes of small superannuation funds that is
much more likely to come into play than excluded and non-excluded funds.
This distinction will increase the cost of establishing a small fund
because the members of the fund will have to seek extra professional
advice to determine whether being an SMF or not is the structure that
best suits the members.
- The change will add to compliance costs (in the short-term) as members
will have to be made aware of their rights and responsibilities as trustees.
And the change will necessitate the transfer out of third party employees,
causing assets to be realised to meet the rollover costs, which may
cause a loss of benefits.
- The ATO must undertake an extensive awareness and education campaign
to ensure trustees are fully aware of their rights and responsibilities
as trustees otherwise the purpose of having all members as trustees
is defeated (that being a commonality of interest and an equality of
influence fails to be achieved). [3]
Alternative proposals were put forward by other witnesses and these are
detailed below:
ASFA generally supports the new definition as it removes arm-length members,
reduces fees and charges and does not affect the majority of excluded
funds. Current figure shows that 85% of excluded funds only have one or
two members. However, ASFA did highlight a few problems.
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 self-managed funds the appropriateness of
allowing a membership to continue once the initial entitlement to membership
has been established. There are also some issues for not-excluded funds
which fall to fewer than five members which require consideration. There
appears to be a sudden-death situation where an approved trustee is required
immediately, and we would like to see some changes there. [4]
When questioned further by Senator Watson on what these changes may be,
ASFA responded:
It is a question of giving more time in a lot of situations. When I say
`sudden death' I mean it is a case of: you fall below and you immediately
must appoint an approved trustee. That is not going to be an easy job
in a lot of situations. This particular issue has been brought to the
committee's attention by the firm William M. Mercer. We would agree that
there is a problem there. Whether the members should decide whether they
are going to stay there will depend, I think, on the particular case.
At times it will not be possible to find an approved trustee, but it may
not be appropriate to let the situation remain as it is. So there may
need to be some discretion there for APRA to allow some time for things
to work through. I actually foresee some quite difficult situations where
funds are on the borderline between the five and the four. [5]
Appointment of the Australian Taxation Office as Regulator for self-managed
funds
From 1 July 1999 the Australian Taxation Office (ATO) will become responsible
for the general administration of self-managed funds.
There was some concern raised by the witnesses to the proposal to shift
the management of SMF from APRA to the ATO. This proposal could potentially
lead to an “inconsistent and uneven playing field” according
to CPA. The CPA believe it is “anti Wallis” to shift regulatory
authority of Small Managed Funds from the APRA to the ATO.
ASFA informed the Committee that there is a need for consistency in policy
and procedures between the regulators. They foresaw a number of SMF would
move between the two regulators as their circumstances changed:
In relation to the regulator, ASFA's preference would be for all superannuation
funds to be handled by one regulator. At the moment, superannuation generally
has two regulators,APRA and ASIC,and now a third here. Things are getting
mighty confused. If you had one regulator, this would be likely to promote
a consistency of philosophy. The movement of regulation of self-managed
funds to the ATO assumes that self-managed funds will not require prudential
supervision. We understand that this is the essence of the reasons underlying
the recommendation from the Wallis report that responsibility for self-managed
funds move to the ATO. If that is the case, the rules for self-managed
funds should be, first of all, consistent with retirement income policy,
and with the trustees of those funds managing their own affairs in accordance
with the rules. The regulator's task is to see that self-managed funds
are acting in accordance with those rules and then leave them to get on
with it. It suggests to us that there will not be a great need for anything
more than an assessment. [6]
We do, however, see a need for consistency in policy and procedures between
the regulators, because the basic retirement income policy has to be reflected
in the policy and procedures for both the self-managed funds and the APRA
small funds. It is also likely that some funds will move between the two
regulators. It would seem to us that, if the funds go to the ATO, liaison,
consultation and consistency will be necessary between the ATO and APRA
to make this work. [7]
When Dr Anderson was questioned on the decision to transfer supervision
to the ATO, she responded:
I think, in the best of all possible worlds, it would be neater if we
had one regulator. Even the distinction between APRA and ASIC is causing
immense problems. You add this to it, and you have more complexity. If
it is a move only because it is administratively simpler, then that is
not a good enough reason. If in fact it is tied up with the kind of rhetoric
that we had in Wallis, which said that basically these people are going
to manage their own affairs and, therefore, they do not need prudential
supervision and are going to be managed in this way by this group, then
I do not have as many problems with it. But I have yet to see how the
ATO will do this more hands-off, `less than $50 spent on you' sort of
supervision. It is not the best outcome for retirement income policy.
[8]
Another witness was concerned that adding another regulator to the superannuation
system would not simplify matters. They stated:
I turn briefly to the introduction of the tax office as a new regulator.
We see the following potential problems and impracticalities: firstly,
the introduction of the ATO adds yet another regulatory body to the superannuation
arena, which can hardly be said to simplify the system; there is the potential
for inconsistencies to arise in the application of essentially the same
legislative provisions, given that the tax office and APRA could both
be responsible for applying the same parts in some cases; there is the
inherent conflict of interest issue,and whether that is actual or perceived
remains to be decided,that the ATO will be more concerned with revenue
collection than promoting self-regulation. [9]
A further witness informed the Committee:
Self-managed superannuation is appropriate as a choice for superannuation
for small business people, self-employed people, professionals and self-funded
retirees, many of whom view this as the superannuation vehicle of choice.
Our submission does raise some concerns about the ATO supervision. As
we state in our submission, we feel that SLAB 3 contradicts the spirit
of regulatory consistency and competitive neutrality that was at the heart
of the Wallis reforms. By introducing a third regulator into the superannuation
arena, we produce potential for inconsistency, overlap and an uneven playing
field. We have some grave concerns about how this is going to transpire
in terms of practice. [10]
Limit on the number of members in a self-managed fund
Blake Dawson Waldron informed the Committee that there is no need to
set a limit as all members must be trustees and be “linked”
and have a place on the trustee board. Limiting the size of funds to 4
members acts unfairly on families and linked business associates comprising
5 or more persons. They recommend on equity and neutrality reasons that
the legislation be amended to allow for a maximum number of 14 members.
Other submissions suggested membership, between 7 and 11. The Australian
Taxpayers Association informed the Committee:
Another issue that we have a problem with is in relation to the number
of members. We believe that there should be more than four members. There
are many families with four children. I give the example of a couple who
have two children who both have spouses. Therefore, we think seven would
be appropriate as the maximum number of members. It does not affect a
lot of people, but those whom it does affect are annoyed by the fact that
they have to set up two funds unnecessarily. [11]
The Australian Retirement Income Streams Association advised the Committee:
You need to strike some balance between a fund being able to provide
balance in its ability to make decisions and not getting too unwieldy.
We picked seven as the number,it seems to be the number between one that
would be too unwieldy and one that would be too few, which we believe
four is. [12]
Mr Lorimer from Managed Superannuation Services Pty Ltd informed the
Committee that membership of Self-Managed Funds should be based on the
composition of the members not the size of the members.
… the number of members alone should not be the determinant in categorising
the nature of a fund. Rather, the focus should be on the composition of
the members of the fund to determine the extent of its prudential supervision
or otherwise. [13]
In our submission we did not set an upper limit. We felt it was appropriate
to have a look at what the background was to this `fewer than five' or
`five or more' issue when it first arose, which would have been some seven-odd
years ago. It essentially revolved around a disclosure or reporting issue
to members of superannuation funds. Our view remains that, without attaching
a specific upper limit to the membership of these types of funds, the
focus must be on the composition of membership of those funds.
If there is a close enough relationship amongst the members, with the
trustees or trustee and/or the employer-sponsor, that should be the principal
determining characteristic of a self-managed fund. [14]
Capital Gains Tax Rollover Relief
The majority of witnesses considered that capital gains tax rollover
relief should be granted to members of existing excluding funds who may
have to restructure or leave their fund in order to comply with the new
legislation.
The granting of such relief would be consistent with the Government's
decision to allow institutions that are restructuring to meet the new
Managed Investments Act requirement according to ASFA. [15]
Also it would also be consistent with the existing Capital Gains Tax relief
on divorce available under the Income Tax Assessment Act 1936.
Dr Anderson of ASFA stated:
We are very concerned that, if anyone has to restructure, we should have
capital gains tax rollover relief. There is no provision within the legislation
for this, and we see this as absolutely vital. If we look at the Managed
Investments Act, that kind of relief was given there, where transfer of
ownership was required solely to enable an existing entity to continue.
Within this, there is a good precedent for it, and it would be very remiss
if we did not have that relief. [16]
ASFA support the granting of relief but believe a more appropriate result
could be achieved through an amendment to the definition of linked
and relative. It is suggested that the definition of linked
be extended to include individuals who on the day they become a pensioner
beneficiary by virtue of the death of a member, met the definition of
relative in paragraph 17A(7) of the Bill with regard to the deceased member.
[17]
The accounting firm R W Aland & Co were very concerned that where
two “arm length” partners dissolve a business arrangement but
still wish to remain together in their super fund that they would need
to restructure but would not receive any capital gains tax rollover relief.
[18] This example would not meet the definition of
a self-managed fund, as arm length members are excluded. The fund would
need to appoint an approved trustee and remain a small-managed fund under
the regulatory supervision of APRA.
Provisions for non-resident members of self-managed funds
Concern was raised by witnesses that if a member of a self-managed fund
went overseas the fund would need to restructure as non-residents were
excluded from these types of funds under the proposed legislation. Mr
Negline, ARISA stated that there was no protection for temporary non-residents
and suggested a couple of ways to remedy this oversight.
There is no protection for temporary non-residents of Australia. If you
become a non-resident superannuation fund, under tax law you will lose
your tax concessions, and the result would be where the trustee has to
remain active as trustee. There are two ways of getting around that. One
of the options that can be considered is that the fund can remain a resident
fund for, say, up to six years while the person is a non-resident. In
other words, it is a bit like the non-residency rules that currently apply
to the family home, so the CGT exemption for family homes would be transported
into the superannuation laws. Another alternative is to perhaps allow
a person to appoint an associate to act as trustee. [19]
Ms Smith advised the Committee that the legislation should cater for
members who for a certain period become non-residents.
I believe that the legislation should address the situation of a member
who becomes a non-resident. If all members have to be trustees, it means
that if someone works offshore you have got a major problem with their
being able to remain as a trustee of that fund. We believe that you should
be able to elect not to be a trustee. If you are part of a group where
it is not an employer-employee situation,whether you have a friends',
family or business relationship,you should be able to elect not to be
a trustee. You should not be forced by the legislation. Some family members
work interstate, so it might not suit them or they do not want the bother
of being a trustee. They completely trust their families to run their
affairs for them in many ways. [20]
Maintaining a Family or Business link between each member of the fund
Ms Smith of the Australian Taxpayers Association informed the Committee
that a number of members of excluded funds would not qualify to operate
a self-managed fund together under the proposed definition of link and
relative. She stated:
Those who have set up with a friend will no longer be able to operate
those funds. I have had many phone calls to our help line relating to
situations involving two friends ,two women, two men, a man and a woman
, who have set up a super fund between them. There is no link other than
their long-term friendship, and they have decided to place their retirement
savings together. This legislation does not allow them to continue. They
are not in business and they are not relatives.
I refer also to the situation of a single widow who has a male friend
who happens to be an accountant and who is her joint trustee ,not a relative,
not a de facto, just a friend ,and she will have to get rid of him. She
has two children, one of whom lives overseas, and the other she does not
want as trustee. The only other relative she has in Australia is an elderly
mother. She is very happy with her current arrangement. This legislation
says that she cannot continue with that arrangement. [21]
Ms Smith informed the Committee:
I do not see why anybody who is a friend or is in a relationship with
another person ,whatever that relationship is, if they are consenting
adults ,should not be a member of the fund. Whether they are lifelong
friends, whether they are friends over several years, whether they are
workmates, or whether they are same-sex couples, I do not see why and
what the mischief is for the legislation to prevent them setting up a
super fund together. [22]
There were arguments put forward by the majority of witnesses that the
definition of relative should be extended to include same sex partners.
Ms Smith, Australian Taxpayers Association advised the Committee:
Same-sex couples have already been discussed. We think that it is very
discriminatory to say that same-sex couples who have already set up funds
or who may wish to do so in the future cannot do so in the future, just
as it is very discriminatory to not allow friends to set up a super fund.
[23]
Or, if you are requiring people to split up the fund where you have got
two friends or same-sex couples, and you have to transfer some of those
assets to the other fund, there are no rollover provisions at all in the
legislation. [24]
Compliance and other associated costs
The cost of compliance to satisfy the requirements of the new legislation
will be substantial according to the evidence presented to the Committee.
For those funds that do not qualify it may mean the appointment of an
approved trustee, at a cost of anywhere between $1000 to $2000. Another
unforeseen cost due to restructuring could be the payment of stamp duty
on the disposal of assets resulting from members having to leave a fund.
Other costs members may incur are legal, accountants and financial adviser
fees for services associated with the restructure of their funds. Ms Smith,
ATA advised the Committee;
If you have several lots of shares, you are possibly going to pay stamp
duty. Shares are registered in different states, so you have to deal with
different stamp duty offices. You have to convince those stamp duty offices
that there is no change in beneficial ownership if you want to circumvent
the payment of additional stamp duty. There may be a change in beneficial
ownership if you are moving an asset from one fund to the next where you
have to split it up. If you want to apply to be an approved trustee it
costs you $2,000 to start with, then you have to have all the necessary
backing to convince APRA that you are suitable as an approved trustee.
[25]
The ATA summarised their view of the proposed legislation as an “overkill”.
In their opinion the changes will not lead to any efficiency gains and
costs savings. The ATA proposes that it is now time to draft separate
legislation for self-managed funds and the other funds to avoid the need
to refer to the SI(S) Act to determine what does and does not apply.
A number of witnesses also raised concerns in respect of self-managed
and non self-managed funds that move from one category to another due
to legislative requirements or other unforeseen circumstances. In their
view no transition period exists to allow them to alter trust deeds and
appoint an approved trustee. Dr Anderson when asked what is the consequences
if a trust deed was not altered as soon as possible following a change
in circumstance, responded:
It is a bit of an unknown how they will act. It would be better if we
had periods set within the legislation, rather than just the discretion.
I think that would probably be safer. Those issues where people are falling
out of one category into another are the sorts of areas that are going
to be very hard to manage. Senator Watson asked if I had an answer. The
answer is that they are going to be very hard to manage, and somebody
is going to have to manage them. That means you are going to have to have
a time period where things are worked through in an orderly manner which
does not involve loss or cost, or at least minimises it. [26]
Another issue raised related to a disqualified person who is a member
of an excluded fund but cannot become a trustee of self-managed fund under
the legislation. Ms Smith believes if there is an appropriate link between
the members than they should be able to remain in the fund and the assets
not be broken up. [27]
Record keeping and associated penalties for non-compliance
Ms Smith informed the Committee that the legislation governing record
keeping is out of step with other organisation requirements and the associated
penalties are regressive.
Records need to be kept for 10 years, whereas other records for the ATO
need to be kept for five years. We think the penalties are beyond comprehension.
We have pointed out that there are over 50 penalty points for not keeping
a piece of paper for 10 years, yet if a company lodges its company tax
return late, the penalty is $10 a week, to a maximum of $200. That should
be compared with the $5,500 fine. There is an $11,000 fine for not keeping
a piece of paper. We think that that flies in the face of the government's
retirement income policy. Those fines should be brought down to a slap
on the wrist, not a hit on the head with a brick. [28]
Each member must be a trustee of the fund
Mr Lorimer, Managed Superannuation Services informed the Committee that
some of his members had indicated that they would like to elect not to
be a trustee of their fund. He stated:
…if all members are related to or associated with each other or
the trustees or the employer sponsor, as the case may be, or any combination
of those, there should not be a requirement for all members to be trustees;
it should be at their option. If they do not want to be a trustee, they
should not be compelled to be a trustee simply to satisfy this new definition.
[29]
When questioned what he saw as the problem with every member of a fund
being required to be a trustee he responded
One of the things being forgotten here is that whether a superannuation
fund is a large fund or a small fund it is still a trust structure. Therefore,
in addition to being subject to the superannuation laws, you are also
going to be exposed as a trustee to general trust law issues, which, as
we all know, carry with them additional rights, duties and obligations.
Some people, whilst being genuinely closely associated with each other
through family or business connections and who would prefer this type
of structure, may not want to assume those additional duties and obligations
that a trusteeship carries with it. It is as simple as that. Perhaps they
should be given the option. But if they do not want to be a trustee, and
provided they consent to the others who are trustees, where is the problem?
[30]
Dr Anderson of AFSA did not support that view and informed the Committee
If you do not want to be a trustee, go to a fund which has the full prudential
regime around it. If you want to be in one of these funds, you have to
be a person who wants to run their own affairs; it is as simple as that.
If you do not want to run your own affairs, then this is not the fund
for you. [31]
Implementation timeframe
A number of submissions requested that the commencement date for restructuring
be altered by a few months to allow sufficient time for funds to appoint
an approved trustee and amend trust deeds, thereby avoiding requests for
extension of time in the future. Dr Andersen advised the Committee that
an additional nine months together with some superannuation regulations
would be a reasonable arrangement.
Yes, but at the same time you would have to have some really quite clear
super regulation,some contact with the regulator so that the regulator
knows what is going on during that period of time. I think the Mercer
submission, or one of the submissions, makes the point that even the trustee
appointing a new trustee from that point is not legal. There are some
really strange anomalies that come around when you fall below that number.
I think the solution is to let the trustee continue for some time under
some supervision, if you like, from the regulator. I do not think you
can stop, because in some cases you will not be able to find a new trustee
automatically. Yes, in some cases you will. But, if they can show some
good reason why they cannot find an approved trustee or why it is going
to be so costly, I think there should be some leeway there once the regulator
knows the situation. It depends very much on the regulator knowing there
is a situation. [32]
The Taxation Institute of Australia recommended that a deeming clause
be included in the legislation so members could avoid having to amend
their trust deeds. In their view this deeming clause would ensure that
the superannuation funds comply with the legislation. [33]
Government Response
Definition of self-managed funds -Deeming Provisions for Trust Deeds
The government advised the Committee that the proposed legislation does
not require members to change their trust deeds in order to meet the definition
of self-managed fund.
Whether a trust deed would need to be changed by the bill would depend
on the actual individual provisions of that deed. There are no explicit
provisions within the bill that would require a trust deed to be changed
to comply with the bill itself. However, if the trust deed contains certain
restrictions on membership, which conflicted with the requirements of
the bill, then there may be a need for the individual trustees of that
fund to review the deed and make any necessary amendments. There are no
new covenants or requirements that are directly being imposed by the bill
on trust deeds. [34]
Appointment of the Australian Taxation Office as a regulator for self-managed
funds
The government advised the Committee that the reasons self managed funds
would be transferred to the ATO is because they do not require prudential
supervision as provided by APRA. There still is a requirement for some
form of compliance checking and this would best be undertaken by the ATO.
The small, excluded funds generally do not require prudential supervision;
rather, they require some form of compliance checking.
Whether, for argument's sake, the preservation requirements or some of
the other non-prudential requirements of SIS are satisfied. The tax office
is better geared and more experienced than APRA in dealing with the large
numbers of returns that would be expected from the small funds. It has
the electronic lodgment arrangements and so on that APRA is yet to develop.
The facts that, firstly, they do not require prudential supervision,and
APRA is a prudential supervisor,and, secondly, the fit in efficiency and
processing suggest that the tax office would be a better regulator of
these particular funds than what APRA would be. [35]
Limit on the number of members in a self-managed fund
The Government informed the Committee that the proposed number of “less
than five” was about right for this type of fund.
The fewer than five has been in the act for a considerable period of
time for the excluded funds. In a sense, it is always a matter of judgment.
The representations that I have had,in my area, a lot of people raise
issues with me. Senator Sherry constantly raises issue with me; a wider
community also does. So you get a bit of a feeling about which issues
are causing problems out there, and the government seeks to address those.
Very few people raised with me under the old excluded funds regime that
there was a problem with the fewer than five. That is the basis on which
I made the comment. We are not stopping people having more. It is just
that you do not come under the self-managed regime. There are substantial
benefits in becoming a self-managed fund in terms of fees. Equally, part
of the feature of this is to make sure that members of the funds are also
trustees and are actively involved. [36]
In respect to the concern from witnesses that a fund that may become
non compliant due to the death a member the government provide the following
explanation:
When a member dies the legal personal representative of that member may
act as a trustee of the fund or a director of the body corporate that
is a trustee of the fund. In such cases, the fund will remain a self managed
superannuation fund until the payment of death benefits commences in respect
of the member. The payment of death benefits through a lump sum or through
the commencement of a pension will usually extinguish a deceased member's
interest in a fund.
In addition, where a fund no longer satisfies the definition of a self
managed superannuation fund, a period of six months is provided to allow
the fund to either restructure so as to either remain a self managed superannuation
fund or appoint an approved trustee and move to APRA regulation.
Under SLAB 3, where death benefits are paid in the form of a pension,
the pension recipient(s)
If this results in the fund no longer satisfying the definition of a
self managed fund, the fund will move to APRA regulation and an approved
trustee will need to be appointed.
If this results in membership of the fund being five or more, the fund
will similarly move to APRA regulation. While there is no need for an
approved trustee (as the fund will have 5 or more members), the fund will
need to meet additional reporting requirements and provide member complaints
mechanisms.
No capital gains tax liability is triggered in any of these events. However,
as is the case for all superannuation funds, where a self managed superannuation
fund needs to sell assets in order to pay death benefits, capital gains
tax liabilities will be incurred if there is a capital gain. [37]
Capital Gains Tax Rollover Relief
The government informed the Committee that in their opinion the legislation
did not impose capital gains tax on members effected by the proposed changes
to excluded funds. The only time that capital gains tax will apply is
when a fund disposes of an asset/s that attracts capital gains tax. In
response to a question on notice from Senator Sherry the Assistant Treasurer
provided the following answer:
There is no need for Capital Gains Tax to be incurred by any fund as
a consequence of the legislation. Funds will always have the option of
appointing all existing family and/or business-linked members as trustees
in the case of self managed funds, or of retaining their current membership
and appointing an approved trustee in the case of small APRA funds. These
events will not trigger capital gains tax liabilities.
Where a fund appoints an approved trustee, or specific amendments are
made to the trust deed to comply with the Superannuation Industry (Supervision)
Act 1993, existing capital gains tax rollover provisions in the Income
Taxation Assessment Act 1997 will apply.
Capital gains tax rollover relief is available for disposals of assets
if a complying superannuation funds amends or replaces its trust deed
to enable it to comply with the SIS Act, provided the fund's members and
assets do not change.
In addition, the mere replacement of a trustee(s), with unchanged membership
of a fund, should not lead to capital gains tax liability, as there is
no change in beneficial ownership of fund assets.
A fund may decide to choose to transfer arm's length members out of the
fund in order to become a self managed fund. These funds would need to
transfer the benefits of those members to another complying superannuation
fund. In such circumstances, the normal taxation consequences would apply.
For example, where these benefits are paid from cash reserves or temporary
borrowing no capital gains tax is due. Capital gains tax liability would
only be incurred where an asset is sold to pay benefits and a capital
gain is made.
As already noted, the fund can avoid any capital gain tax liability by
retaining existing membership and appointing an approved trustee. [38]
Members of existing excluded funds who decide to restructure to become
a self-managed fund will not incur capital gains tax unless it is required
to sell assets to pay for the transfer of an existing member from that
fund. The government stated:
In some limited circumstances it may be that the only assets that can
be realised to finance the member's transfer will be assets that are subject
to capital gains tax. That is going to depend on the underlying asset
structure of the fund. [39]
Provisions for non-resident members of Self-managed funds
In relation to concerns that a non-resident member could cause a fund
to become non-compliant under the legislation the government provided
the following response:
The issue of residency is somewhat more complex than simply whether somebody
resides overseas. There are actually two tests that need to be satisfied.
One is that the central management and control of the fund remain within
Australia.
It depends on how you have structured your trustee fund. If it is a body
corporate that is a resident company, the mere fact that one director
temporarily resides overseas may not negate that test. There is also a
requirement generally that more than half the accumulated entitlements
of a superannuation fund remain with active members who are Australian
residents. So the mere fact that somebody moves overseas may or may not
activate the residency problems. There is always the option, if it is
a problem, that if the residency of the trustee is at issue, that consideration
can be given to switching to an approved trustee. I should comment that
the fund would still need to meet other residency requirements, including
the residency of the active members test in the taxation act. So there
is certainly some flexibility. [40]
The government also provided a more detailed response to a question on
notice from Senator Ferguson. (refer Appendix 3)
Maintaining a family or business link between each member of the fund
- Definition of “relative”
The government admitted that this legislation does not cater for same
sex couples to be members of self managed funds unless they are in a business
relationship that satisfies the legislation. However if they are just
friends who wish to enter into a financial arrangement between each other
they can do this through a variety of other types of superannuation funds.
I do not accept that there is a policy difference. The same-sex couples
issue is a far wider issue than the one associated with the DIY funds.
It would not only require changes to the SI(S) Act but also would require
changes to the income tax laws and probably in the social security area.
I think it is a far wider issue than the issue that we are facing here.
If there were same-sex couples,as was pointed out by Senator Murphy,there
is no requirement to come under the self-managed funds approach. I think
that is a wider issue. It is an issue that your party presumably grappled
with when they were in government and did not change it. We understand
that and we think this is a wider issue than that.
You do not become a self-managed fund. That is the point. I think I am
right,if there is an officer at the table who would like to correct me,
they should feel free to do it,no-one is stopping them. If people wish
to enter into this sort of arrangement to have their super fund, they
can do that. This does not stop them. [41]
Mr Thomas, Australian Taxation Office added:
There was one other point on that which is, as am sure you are aware,
where same-sex partners have a business relationship they can continue
in a self-managed fund together. That was just the point of clarification
that needed to be made. [42]
Compliance costs and other associated costs
The government advised that following enquires regarding the cost of
appointing an approved trustee to a non self-managed fund they were provided
with two quotes. These were:
- A one-off transfer fee of $300;
- A one-off transfer fee of 1.5 per cent of the funds assets. [43]
Implementation timeframe
The government advised the committee that the provisions allow nine months
for restructuring (from 1 July 1999 to 31 March 2000) which is an appropriate
period of time in their view. If it were to be delayed any longer it would
cause some problems.
It would make some difference. Basically, however, because of the way
the legislation is drafted,perhaps it is useful to explain here that APRA
is the default regulator,any fund will stay with APRA until such time
as it has met the definition of self-managed fund. If it has not met that
definition by 31 March 2000, then APRA has the power to appoint another
trustee. The strict liability offence, if they have not met the definition
by 1 July 2000 or if they want to stay with APRA,have not appointed an
approved trustee,kicks in from 1 July. The intention is that APRA would
really only be taking any action against a fund that had not started to
make reasonable attempts after 31 March to appoint an approved trustee
or to meet the definition of self-managed fund.
In effect, the acid test, if you like, of whether a fund moves to the
tax office during that year is 30 June. If it is a self-managed fund on
that date, it moves to the tax office. To allow any further slippage would
mean you are into the next financial year, basically. [44]
The government also provided a detailed explanation on how the process
of lodging returns would work and how this will occur this and next financial
year.
The returns due on 31 March 2000 are in respect of the financial year
that we are currently in, so there is a nine-month period of time for
them to lodge their returns. APRA is currently the supervisor at 30 June
this year. The returns to that supervisor will be lodged with that supervisor
by 31 March 2000. The returns in respect of the year ended 30 June 2000
will lodge with either the tax office or APRA, depending on whether the
funds are self-managed funds or small APRA funds. There will be a notice
issued during the month of March 2000 to enable the regulators to determine
where the funds are going and to assist the process of identification
of who is subject to regulation by whom. [45]
Recommendation
The Committee recommends that the Bill be passed.
Senator Alan Ferguson
Chairman
Footnotes
[1] Selection of Bills Committee report No.
8 of 1999, dated 11 May 1999.
[2] Explanatory Memorandum, p.5
[3] Submission No.10
[4] Evidence p.E2
[5] Evidence p.E2
[6] Evidence p.E2
[7] Evidence p.E3
[8] Evidence p.E4
[9] Evidence p. E18
[10] Evidence p. E14
[11] Evidence p. E7
[12] Evidence p. E11
[13] Evidence p. E17
[14] Evidence p. E19
[15] Submission No. 5
[16] Evidence p.E3
[17] Submission No.5
[18] Submission No.14
[19] Evidence p.E11
[20] Evidence p.E7
[21] Evidence p.E7
[22] Evidence p.E9
[23] Evidence p.E7
[24] Evidence p.E10
[25] Evidence p.E8-9
[26] Evidence p.E5
[27] Evidence p.E8
[28] Evidence p.E8
[29] Evidence p.E17
[30] Evidence p.E19
[31] Evidence p.E6
[32] Evidence p.E3
[33] Submission p.E14
[34] Evidence p.E21
[35] Evidence p.E26
[36] Evidence p.E24
[37] Question on notice p.6
[38] Question on notice p.8
[39] Evidence p.E22
[40] Evidence p.E22
[41] Evidence p.E25
[42] Evidence p.E31
[43] Question on notice p.3
[44] Evidence p.E25
[45] Evidence p.E26