Superannuation Legislation Amendment Bill (No. 3) 1999
Table of Contents

Minority Report – Australian Labor Party

Introduction

This bill essentially makes three substantial changes to the operation of what are currently known as excluded superannuation or Do-it-yourself superannuation funds:

• Introduces a new definition of self managed funds to replace the definition of excluded funds;
• Completely abolishes Government prudential regulation of excluded funds, currently undertaken by the Australian Prudential Regulation Authority (APRA) and transfers the supervision of excluded funds to the Australian Taxation Office (ATO); and
• Introduces a new fee structure affecting excluded funds.
• A number of technical issues relating to the operation and impact of this bill will be addressed in more detail below but the fundamental question which remains unanswered by the Government is why the changes relating to the definition of self-managed funds and the transfer to the ATO are necessary in the first place.
• Labor Senators agree with evidence given to the Committee by several expert witnesses that this bill will impose a number of adverse impacts on superannuation funds and their members, including:
• Increased complexity and confusion by introducing the ATO as a third superannuation regulator;
• Increased costs to excluded funds who will need expert advice on the impact of this bill as a minimum, and may need to restructure as a result of the passage of this bill;
• The triggering of a Capital Gains Tax Liability (CGT) and possibly a stamp duty liability for those members who are required to transfer out of their current excluded fund into an APRA regulated fund; and
• Discrimination particularly against same sex couples currently who are currently legitimate members or trustees of excluded superannuation funds.
• In addition, several features of the bill appear to contradict the Government's stated policy objectives, including the key objective of increasing the protection of the interests of arms length fund members currently in excluded funds.
• Finally, Labor Senators are disappointed with the evidence provided directly to the Committee by Treasury and in response to questions on notice. Attempts to side-step the obvious CGT liability that this bill could trigger for individual fund members apparently contradicts the Government's stated policy objective. It also does little to promote a cooperative environment with which to achieve rapid passage of this bill through an already crowded Senate legislative program, caused in large part by the Government's inability to manage it own business program in the Senate.
• Labor Senators recommend that the Senate not support passage of the bill until the Government addresses a range of concerns raised by several expert witnesses to the Committee and outlined below.

The case for change

1. The Government has put the case for changes to the current regulation of excluded funds that arms length members of excluded funds are not able to best protect their interests in the fund because it is not regulated by the APRA or an approved trustee.
2. However, little evidence has been provided to the Parliament to suggest that arms length members are not able to best protect their interests in excluded funds. While a theoretical case might be made to support this argument, the Government did not present any actual evidence. It is worth noting that the proposal for all members of the proposed self managed superannuation funds to become trustees of the fund and have a business or family link , is critical for supporting the second stage of the bill, the transfer of supervision from the APRA to the ATO.
3. Similarly, the Government did not provide evidence in support of the need to transfer the regulation of excluded superannuation funds from the APRA to the ATO. Again, it seems that the main reasons for the transfer are twofold :
   1. 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 lodgement 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. [1]
   2. On face value, this evidence raises a significant concern. The APRA and the Insurance and Superannuation Commission before it seem to be admitting that they have not been very successful in regulating – in either prudential or compliance terms – excluded superannuation funds in the past. If this is the case – and there is evidence that excluded funds require further regulation – then the transfer of the regulation to the ATO may be prudent public policy.
   3. However, this policy is likely to cause a number of adverse impacts on superannuation funds and their members which must be balanced against any perceived public policy benefits arising from the proposed changes.

Increased complexity and confusion

1. The Committee heard evidence from a number of witnesses suggesting that this bill would add to the already enormous complexity and confusion surrounding superannuation regulation in Australia. The Association of Superannuation Funds of Australia (ASFA) told the Committee that the transfer of regulation from the APRA to the ATO would create a third regulator, where there were previously only two. [2] Superannuation originally had only one regulator – the ISC.
2. The effect of this additional regulator will only cause increased confusion amongst superannuation members, trustees and administrators. Employers are also likely to be confused by the addition of a third regulator.
3. The Australian Society of Certified Practising Accountants suggested to the Committee that the introduction of a third regulator for superannuation was anti-Wallis in that it contradicts the spirit of regulatory consistency and competitive neutrality that was at the heart of the Wallis (Financial Sector Reform Inquiry) reforms. [3] While this evidence directly contradicts the Government's claim that it is implementing a recommendation of the Wallis report, it suggests that some of the evidence and recommendations of the Wallis inquiry concerning superannuation and other areas were based on a peripheral examination, at best. Labor has supported many of the main Wallis inquiry recommendations and assisted the passage of this legislation through the Parliament. However, the Government should be put on notice that simply citing that it is giving effect to a Wallis inquiry recommendation is not a particularly strong argument when it is a recommendation which was at the periphery of the Wallis inquiry.
4. ASFA also suggests that having three regulators is likely to result in an inconsistent philosophy applied to the regulation of superannuation. If this does occur, if the regulators do apply different interpretations to superannuation laws and regulations, confusion will occur to the detriment of retirement incomes policy. [4]
5. Labor Senators determine that the risk of the rules for retirement incomes policy to be inconsistently applied to self managed funds is high. The Government has consistently chopped and changed the superannuation rules since it introduced the administratively complex and costly superannuation surcharge tax. Retirement incomes policy has been a continuous casualty of the constant confusion caused by these changes.
6. One possible solution for at least alleviating the risks of confusion is to ensure an appropriate education campaign is conducted. The survey undertaken by the National Institute of Accountants of its members suggested that the ATO should undertake this campaign to ensure that trustees are fully aware of their rights and responsibilities. Labor Senators argue that this education campaign should not be limited to fund trustees but should also be extended to superannuation fund members. Labor Senators are mindful that the Government cut funding for the ATO's Community Education campaign in its 1997 Budget. It would be prudent for the Government to assure the Senate that it will provide funding for an effective and targeted education campaign.
7. Finally, confusion is more likely to occur under the Government's legislation as some small superannuation funds may move between regulators as their circumstances change. [5]

Increased costs

1. One of the purposes of this bill is to reduce the cost of supervision for excluded superannuation funds. Yet, many of the expert witnesses who presented evidence before the committee or made submissions argued that costs were likely to increase, at least in the short term and perhaps in the longer term.
2. The Assistant Treasurer's own answer to a question on notice from the Committee Chair, Senator Ferguson, about the cost of appointing an approved trustee to an existing excluded fund confirms the potential cost increases. The cost, according to the answer, could be between $300 and 1.5 per cent of the fund's assets. What this answer does not say is that, in order to be cost effective, accountants and superannuation consultants generally only recommend excluded superannuation funds to persons with more than $100,000 to invest in the fund. 1.5 per cent of a fund with a minimum balance of $100,000 would result in a fee of at least $1,500 to appoint an approved trustee.
3. The issue of costs incurred as a result of the new proposed penalty regime was also raised by a Government Senator, Senator Watson. In an answer to a question on notice from Senator Watson concerning late lodgement of documents, the Government responded that new section 106A of the Superannuation Industry (Supervision) Act 1993 allowed for fines of up to 100 penalty units in the event of contravention. According to the answer, this penalty was consistent with `Commonwealth criminal law policy and comparable with other SIS Act offence provisions and penalties.' [6] Yet, by way of example, the answer states that `failure to lodge an annual return under the SIS is an offence provision which carries a maximum fine of 50 penalty units.'
4. The Government's claim that a penalty of 100 penalty units is consistent with other comparable SIS Act offence provisions is exposed as false by its own answer. Clearly, 100 penalty units is double the example penalty of 50 penalty units.
5. The upshot is that the potential cost to superannuation funds who fail to meet the provisions of proposed Section 106A, for whatever reason, could be double that proposed as an example by the Government in existing legislation.
6. Labor Senators recommend that the penalty provisions be amended to ensure true consistency with existing legislation.
7. The survey of its members by the National Institute of Accountants also stated that the creation of distinct classes of small superannuation funds is likely to increase the cost of establishing a small fund as members seek extra professional advice. [7] Given that it is likely that NIA members may be sought out for that advice, one might expect an element of self-interest in the NIA advocating the bill pass without amendment. That is not the case however.
8. Labor Senators conclude that the forced restructure of excluded funds required under this bill will lead to cost increases for many funds and will impact on returns available for fund members.

Adverse taxation consequences

1. It is clear to all but the Government that the practical application of this bill will result in a Capital Gains Tax (CGT) liability for some superannuation funds and fund members.
2. In response to a direct question from Senator Sherry, the Government provided a detailed answer which avoided the practical application of the proposed changes. [8] The argument that a fund would not necessarily have to restructure in a way which would trigger a tax liability is spurious, at best and actually goes against the Government's stated aim of the bill.
3. Fund members who are currently arms length members may not be able – or may not wish to – become trustees of the fund or have a family or business relationship with the other fund members. In this circumstance, that fund member has no option but to leave the fund. The Government argues that it is possible for the fund to retain their current membership and appoint an approved trustee in the case of small APRA funds.
4. However, what happens if the fund does not wish to retain its current members?
5. Presumably, the Government would respond that an arms length fund member could lobby the trustees of the fund to retain them in the fund and appoint an approved trustee (at considerable cost, as noted above). However, the Government's prime claim for introducing this bill is that arms length fund members cannot best represent their interests in the fund. Hence, we have the contradictory argument that fund members can somehow persuade the trustees not to boot them out in order to become a self-managed fund, but they apparently cannot best represent their interests in the fund.
6. The fact is that this bill provides arms length fund members with little choice at all. They will be required to do what the trustees want them to do, or get out of the fund. If they get out of the fund and the fund is forced to sell assets such as property to fund the members' entitlements, the fund will incur a CGT liability. As a direct consequence of the Government's bill, some excluded superannuation funds will incur a CGT liability.
7. Labor Senators strongly urge the Government to re-examine this issue and consider providing roll-over relief for funds and fund members which incur a CGT liability as a result of restructuring under this bill.
8. The Committee received evidence from a range of witnesses that precedents already exist which provide roll-over relief in the event of restructuring, without benefit, as a result of Government legislation. Taxation Laws Amendment Bill No. 7, 1999 which is currently before the Parliament provides for roll-over tax relief in the event of an unintended tax liability incurred by a managed investment scheme which restructures under the Managed Investment Act 1998. Similarly, the report of the Joint Parliamentary Committee on Corporations and Securities into the Corporate Law Economic Reform Bill, 1998, recommends that CGT roll-over relief be provided in the event of a CGT liability caused through the compulsory takeover provisions contained in that bill. It would both consistent and a simple matter for the Government to provide similar relief to superannuation funds who experience a CGT liability as a result of having to restructure or sell assets due to this bill.
9. Given the question pursued by the Chair of the Committee during hearings into this bill, Labor Senators find it surprising that the recommendation proposed by the Chair of the Committee is for the bill to pass without amendment. Senator Ferguson and Senator Watson directly raised the issue of the sale of assets with Treasury and the Assistant Treasurer and received a less than satisfactory answer:
10. Senator WATSON—I think this question is for the minister: given the difficulties of funds which may have to change because of the new rules, is there any possibility of capital gains rollover relief?
11. Senator Kemp—My understanding is that the current rules provide sufficient capacity to deal with issues where capital gains may occur. The legislation which exists at the moment provides relief.
12. Senator WATSON—Where, for example, a fixed asset has to be sold?
13. Senator Kemp—We are unconvinced that we need new rules to cover that. Obviously if there were particular views put forward we would listen to them, but I would have to say that the government's position coming to this hearing is that—
14. CHAIR—For example, say you have some real estate and you have to sell it—wouldn't there be capital gains tax under that situation?
15. Ms Lejins—If the underlying fund actually disposes of an asset and, in the course of the disposal of that asset, a capital gain is realised, that fund will be liable for capital gains tax.
16. CHAIR—So there will be capital gains tax?
17. Ms Lejins—Yes. But the mere replacement of a trustee or the amendment to a trust deed without a change in membership or underlying assets of the fund would come within the existing capital gains tax rollover provisions of the Income Tax Assessment Act.
18. CHAIR—But, arising from these changes, some members might have to move out and that might give rise to the disposal of an asset. In the disposal of that asset there would normally be capital gains consequences. So because there has been a legislative change imposed upon these people, there is going to be some tax. Admittedly, it may not be at all that high a level—15 per cent or something like that—but I can see occasions where, as a result of this new legislation, certain assets will have to be sold which will give rise to the potential of a capital gains tax.
19. Ms Lejins—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.
20. CHAIR—Yes, of course. But we are saying that because there is a legislative change forced upon people, a capital gains tax can arise, therefore some people foresee, in terms of justice, a need for some relief. [9]

Discrimination aspects

1. Superannuation Legislation Amendment Bill 1998 recently passed the Parliament with the support of the Opposition. It contained provisions in it which allowed superannuation trustees to amend trust deed to accept binding death benefit nominations from fund members. The passage of this bill goes some way toward ending the discrimination which currently occurs against couples in same sex relationships, although not as far as the private members bill currently before the Parliament awaiting debate. It seems anomalous that this bill directly discriminates against same sex couples by removing one of the few existing avenues by which benefits can be directed to a same sex partner through an excluded superannuation fund. By requiring members of the funds to be family members (but excluding same sex families) or have a business relationship, excluded funds will be forced to restructure and it will no longer be possible to ensure benefits are directed to a same sex partner in the event of death. [10]
2. The issue of the superannuation and taxation treatment of same sex couples is broad ranging however in this case, the Government appears to discriminate unnecessarily against same sex couples. Labor Senators urge the Government to revisit this issue before the bill is passed.

Contradicts retirement incomes policy

1. This bill again reinforces the perception that the Government has little or no regard for a coherent retirement incomes policy. Several aspects of this bill contradict the Government's own retirement income principles:
2. Increased complexity undermines public confidence in superannuation. People are less likely to invest additional contributions in superannuation if they do not understand or have confidence in the regulatory environment surrounding their retirement nest egg;
3. Increased costs will result in lower retirement incomes. Simple arithmetic suggests that increasing compliance costs must come out of the retirement incomes of fund members; and
4. CGT liabilities triggered as a result of complying with this bill will further erode retirement incomes.

   ASFA also suggest that this bill is “not the best outcome for retirement income policy.” [11]

   Advice from the Treasury

   Labor Senators appreciate the timely response provided by Treasury officials and the Assistant Treasurer to questions on notice taken during hearings on the bill.

   However, some of the answers appear extremely skewed toward achieving the intent of the legislation, despite expert evidence from other witnesses to the contrary. While Labor Senators expect the Treasury to provide advice in support of the policy espoused by the Government of the day, appropriate advice to Senate Committees will greatly assist the Senate in improving the standard of public policies which pass the Parliament. It will also assist in eliminating delays to the Government's legislative program arising from a range of contradictory evidence.

   Treasury's dogged insistence that super funds have options available to them under this bill which will prevent incurring a CGT liability is a good illustration of this point, as the Committee's Chairman discovered in trying to get an answer to his CGT question. The answer provided may be technically correct, but in practice the situation will be different. The Assistant Treasurer seemed content to resort to a `won't work in practice' defence against Senator Watson's question on notice concerning deeming rates. [12] However, the same use of the concept of practical application did not extend to the CGT issue.

   Recommendation

   Labor Senators recommend that the Senate not support passage of the bill until the Government addresses the issues raised in this report.

   Senator Shayne Murphy Senator George Campbell

   Deputy Chair

   Footnotes

   [1] Evidence p. E27

   [2] Evidence p. E2

   [3] Evidence p. E14

   [4] Evidence p. E2

   [5] Evidence pp E3-4

   [6] Answer to question on notice, No.6, Hansard p. E31)

   [7] Submission No.10

   [8] Answer to question on notice, No.4, Hansard p. E29)

   [9] Evidence pp E21-22

   [10] Bills digest, No. 188 1998-99, p.7

   [11] Evidence p.E4

   [12] Answer to question on notice, Question No. 5, Hansard p.E30