Re: NIA submission to the Senate Economics Legislation Committee
on the Superannuation Legislation Amendment Bill (No.3) 1999
The National Institute of Accountants (NIA), a professional association
representing over 12,000 accountants mainly in the small business would
like to thank you for allowing the NIA the opportunity to provide feedback
on this Bill.
Enclosed is a hard copy of the submission that the NIA sent to the Retirement
Income Policy Division of the Department of the Treasury on 19 March 1999.
The submission was made in response to an Exposure Draft of this Bill
released by the Assistant Treasurer on 5 March 1999. The concerns raised
about the exposure draft by the NIA and others are not reflected in the
Bill now before the Senate.
The attached submission expresses concern about the negative impact that
the changes announced in this Bill will have on small funds, especially
the structuring and administration of small funds. The NIA believes that
the proposed changes do not meet the objective of improving retirement
savings in Australia.
This Committee should consider options for reducing or removing the negative
impact on small funds as a matter of priority. To assist the Committee
in its deliberations about this Bill, the NIA strongly recommends that
this Committee consider the recommendations in the attached submission.
If you have any queries, please do not hesitate to contact Gavan Ord
or myself on (03) 9249 5594 or e-mail on .
Yours sincerely
Elizabeth Joldeski
TECHNICAL POLICY MANAGER
Attach.
NIA SUBMISSION ON superannuation legislation amendment bill (no.3)
1999 Exposure Draft
The National Institute of Accountants (NIA) is a professional accounting
association representing over 12,000 accountants, many of whom are superannuation
specialists or who deal with superannuation as part of their business.
The NIA focus is on small to medium sized enterprises and thus, many of
our members have a high level of interest in changes to the legislation
regulating small superannuation funds.
In preparation of this submission, the NIA asked members with a specialisation
in small superannuation funds a number of questions. The responses supported
the NIA position that even though the NIA mostly supports the general
thrust of these changes, there are aspects of the exposure draft that
need attention because the NIA believes that these changes will not induce
an improved retirement savings outcome in Australia. Responses also support
the NIA position that stability in superannuation law and policy is desperately
needed.
Definitional Changes
In the questionnaire to members, a number of questions were asked including
a question about whether the change in definition would assist small superannuation
funds. The general response and the NIA position is no because:
- 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).
Although the overall response and the NIA opinion is not favourable,
the NIA and the surveyed members saw the change as:
- creating some certainty;
- helping to ensure that all members are actively involved in the management
of their money, and;
- using the term SMF rather than “excluded funds” is a much
better descriptive word for such funds.
Management of non-SMF's
Another question asked whether the requirement for non-SMF small superannuation
funds to appoint an `approved trustee' was too onerous for small funds.
Overwhelmingly, members and the NIA agree that the requirements for non-SMF's
to appoint an approved trustee is too onerous and costly for those funds.
The Government needs to recognise that by excluding many small superannuation
funds, such as an employee only fund of a small employer from the definition
of SMF, many currently `excluded funds' will never come within the definition
of an SMF. By requiring such funds to have an approved trustee, this policy
encourages the abandonment of small funds, which have been established
for legitimate purposes in favour of large funds. It is difficult to see
any policy reason in creating disincentives for small funds. Small superannuation
funds that are not SMF's will not be attractive because of the cost involved
in appointing an approved trustee and other extra compliance requirements.
It should also be recognised that the apparent proliferation of small
funds over recent years is in part due to disenchantment of the public
with the performance of approved trustees and fund managers, often because
such people operate with a perceived bias towards self interest, rather
than acting in the members' best interests. Therefore, many people and
employers have apparently established small superannuation funds for the
reason that they are of the opinion that they could manage a fund at a
lesser cost and achieve a better return than from approved trustees and
fund managers, so why should these people have to go back to an investment
option they have little faith in.
By providing disincentives for the establishment of small superannuation
funds, the Government is restricting the options for members in choosing
a superannuation structure that best suits their needs.
To overcome the disincentive for non-SMF's that were excluded funds the
Government could undertake a number of different options:
- Continue to apply the removal of requirements for `excluded funds'
to non-SMF funds that are currently excluded funds as long as those
funds can prove sufficient prudential management is in place (grandfathering
the current arrangements for `excluded funds').
- The existing method has sufficient safeguards, such as audits that
will help to ensure continued prudential management by members where
members choose that option (there should be no legislative restriction
on members appointing an approved trustee where they believe that to
be the best option for their fund).
- De-regulate the term `approved trustees' for small funds so that increased
competition will decrease the cost of appointing such a trustee.
- The requirement for a non-SMF to appoint an approved trustee can be
ameliorated by a change in the legislation allowing non-SMF's with fewer
than five members to not have to appoint an approved trustee if all
members of the non-SMF agree in writing that the appointment of an approved
trustee is not necessary, and instead, members of such funds should
be able to appoint a managing trustee from the membership of the fund.
- If members and trustees of a non-SMF with fewer than five members
have better education (especially for trustees), it reduces the need
for legislation to require the appointment of an approved trustee, thus
reducing compliance costs.
- Another option for non-SMF's with two to four members is that at least
two members must be trustees (who have had sufficient training mentioned
above). This should provide sufficient prudential management without
the costly need to appoint an `approved trustee'.
Timeframe for adjusting structure
Giving until 31 March 2000 for excluded funds to adjust their structure
to meet the definition of a self managed fund is consider sufficient time
for funds to alter their structures, especially if the only changes that
are necessary is the amending of the Trust Deed to ensure that the members
are the trustee(s). The time may not be sufficient in terms of adjusting
the type of investments that the fund may be currently committed to.
Some investments may be rigidly contractual in nature and the cost of
setting aside such an arrangement may be prohibitive. Contracts that are
currently in existence should be permitted to run their course to fruition
for the benefit of the fund and its members. This situation is especially
so when funds have to cut out third parties (such as employees) and dispose
of assets to meet rollover requirements.
Therefore the Commissioner of Taxation should be given the discretion
to be able to extend that date for adjusting structure in extraordinary
circumstances.
ATO administration of SMF's
The NIA and virtually all the members surveyed express concerns about
the potential affect on SMF's of the ATO administering such funds. This
view exists because of the different organisational culture of the ATO
in comparison with APRA as the ATO has a much greater audit background
than APRA.
To ensure mechanisms are in place to define the rights and responsibilities
of trustees and the ATO, not only should the ATO embark on an extensive
awareness campaign but also set out these rights and responsibilities
in a charter recognised in legislation. The Taxpayers' Charter is an example
which can be drawn upon when preparing a charter, but to give a charter
extra viability, the charter should be recognised in legislation.
Other issues
Minors as a member of an SMF
In a fund with one parent and one child, a trust may have two trustees
being the one person. That is, the parent acts both for himself or herself
and for the child. The NIA is seeking clarification as to whether this
interpretation is correct and if so, then the NIA would support such legislation
as it removes any unnecessary complications from having other trustees
act on a minor's behalf.
Conclusion
This submission puts forward a number of issues and gives options to
make those issues more workable and acceptable to the community. I thank
you for taking the time to read and consider this submission.