SUBMISSION BY THE TAXATION INSTITUTE OF AUSTRALIA
ABBREVIATIONS
| TIA |
Taxation Institute of Australia |
| SLAB No.3 |
Superannuation Laws Amendment Bill (No.3) 1999 |
| APRA |
Australian Prudential Regulation Authority |
| ASIC |
Australian Securities and Investment Commission |
| ATO |
Australian Taxation Office |
| SIS Act |
Superannuation Industry (Supervision) Act 1993 |
| SMF |
Self managed superannuation fund |
| ITAA 1936 |
Income Tax Assessment Act 1936 |
| ITAA 1997 |
Income Tax Assessment Act 1997 |
| OSS Act |
Occupational Superannuation Standards Act |
GENERAL COMMENTS
Complexity and duplication
The TIA is concerned that the scope for complexity and duplication in
the administration of superannuation funds covered by Superannuation
Legislation Amendment Bill (No.3) 1999 (SLAB No.3) will be further
increased because APRA and ASIC and now the ATO will all have powers under
the SIS Act to administer these funds.
In addition, multiple regulators administering the same legislation leads
to the possibility of different conclusions and interpretations on same
legislation. For example, there will be a need to co-ordinate the technical
and administrative consistency of taxation rulings being issued by the
Commissioner of Taxation and the content APRA circulars.
SLAB No.3 does not adequately address layers of complexity in the administration
of superannuation funds. For example, the role of the auditor is still
paramount in the operation of a particular SMF, even though members of
this fund may also be trustees of superannuation funds in their own right.
Accordingly, an added layer of complexity is being retained.
Implementation time frame
Although the time frame for compliance has been extended, the TIA is
of the opinion that experience in dealing with changes in the superannuation
field would suggest that there is still not adequate time allowed for
superannuation funds to bring themselves into line with the SLAB No.3.
It is likely that the superannuation industry will still have to make
applications for further extension of the time frame for compliance.
For example, in the context of the change from the former Occupational
Superannuation Standards Act to the SIS Act, it was a number of years
before trustees were able to get their Trust Deeds amended and every other
aspect required by the change in place.
It is recommended that a deeming clause should be included in SLAB No.3
which would avoid the need for trustees to seek Trust Deed amendments.
Also such a deeming clause will effectively ensure that superannuation
funds are complying with the legislation.
Default regulator
The TIA proposes that SLAB No.3 should be amended to include a provision
for a “default regulator” as means of ensuring that an
SMF's functions will always be covered by a regulator, in the event that
the legislation does not cover some function of an SMF. It is recommended
that the “default regulator” be the ATO rather than APRA.
Capital Gains Tax Relief
There is a need to consider Capital Gains Tax roll-over relief in the
context of SLAB No. 3. For example, in the event of divorce or business
breakdown, many superannuation funds will be forced to sell and dispose
of assets. This is a disposal of assets resulting from regulatory change
which is outside the current scope of Capital Gains Tax relief.
Accordingly, the TIA refers to the precedent of the limited Capital Gains
Tax roll-over relief provisions which were introduced with the SIS Act,
and recommends that similar provisions be introduced in the context of
SLAB No.3 in the event of a regulatory driven division of superannuation
fund assets.
Such a request for Capital Gains Tax relief is also consistent with the
existing Capital Gains Tax relief on divorce available in Income Tax
Assessment Act 1997. These provisions allow for the transfer of assets
between parties in the event on a divorce settlement. However, a superannuation
fund is a separate entity, taxable under Part IX of the Income Tax
Assessment Act 1936 and, accordingly, the existing Capital Gains Tax
roll-over provisions for divorcing spouses would not apply.
Five or less member rule
There is a need to re-evaluate “five or less member”. This
rule is an arbitrary number that was chosen without real regard to the
number of likely members in a small superannuation fund.
It is not unreasonable for many families to want to include at least
their immediate issue as members in a superannuation fund. However, currently
this is not possible. Particularly in the context of annuities being payable
to dependent children under the age of 18 on the event of the death of
the main member of the fund and those annuities resulting in multiple
pensions, there will be situations where more than five members will be
in place.
It is recommended that it would be a simple matter to increase the number
of members to at least twelve members, provided that all such members
are either directors of the trustee company or trustees themselves. The
evidence from the TIA's members suggests that many small superannuation
funds are forced to split into two funds because of the operation of this
rule.
It is considered that such an increase of the number of members in a
small superannuation fund as recommended above is within the spirit of
the legislation and would satisfy the needs of many family groups.
Separate legislation for small superannuation funds
It is recommended that there should be separate superannuation legislation
for small superannuation funds.
Treasury has indicated that the provisions of the SIS Act, which relate
to the ASIC obligations, are to be carved out into a separate act. It
is submitted that it is consistent with this view for small superannuation
funds to have provisions which are unique to these funds and under the
direct legislative powers of the Australian Taxation Office. There are
a number of SIS Act provisions which really only have application to small
superannuation funds, and many other provisions really only have logical
application to larger superannuation funds. In addition, the interpretation
of provisions as they relate to a large corporate or master fund and as
they relate to a SMF, are quite different.
Change in residency status
Where a trustee of a superannuation fund is also a member of superannuation
fund, no consideration has been given to the situation where a member
of the fund becomes a non-resident.
If a member of a superannuation fund becomes a non-resident, the superannuation
fund itself is at risk of becoming a non-resident fund under the Income
Tax Assessment Act 1936. This will have a number of taxation consequences.
For example, there are severe consequences with the taxation of the market
value of the fund at a rate of 47% on its net assets because it becomes
a non-complying non-resident superannuation fund. Many members of superannuation
funds are not aware of the implications of the fund becoming a non-resident
non-complying superannuation fund.
There is no discretion for the Commissioner to consider a situation where
a person intends to become a resident at a later time and thereby eventually
receive superannuation benefits in Australia. The current provisions of
division of section 6CA are onerous, punitive and far out weigh any perceived
risk to revenue. Accordingly, the issue of non-residents who were residents
of Australia and are trustees of the superannuation fund must be determined
with great urgency.
Specific Comments
A Bill for an Act to amend the law relation to superannuation, and
for related purposes
Clause 2: Commencement
As discussed in the preamble, we acknowledge that the commencement date
has been deferred to 1 April 2000 and 1 July 2000 for items 29 and 52
and items 43 and 49. However, we comment that practically the implementation
is likely to take a greater amount of time than this and that Industry
will therefore be asking for further extensions.
Schedule 1 - Amendment of Superannuation Industry (Supervision)
Act 1993 relating to self managed superannuation funds
Item 10: (subsection 6(1)) – general administration
It is noted that the Commissioner of Taxation had the general administration
of the provisions to the extent that they relate to self managed superannuation
funds. It is submitted that it is difficult for trustees to be able to
determine which section of SIS will apply to self managed funds.
Item 21: (new subsection 10(3)) – Definition of a member of
a SMF
The word “member” should include any person who receives a
pension, and this subsection should not be limited in its application
to SMF's. All superannuation funds should be included, because a “member”
is a person/entity who/which may receive a pension.
Item 22: (new section 17A) – Definition of an SMF
Re-evaluation of five member rule
- Please refer to comments made above in paragraphs 11 – 14 inclusive.
Parents representing children as trustees
There is some concern that a parent representing a child as trustee of
a superannuation fund may not be a legal personal representative of the
child, because the parent has not technically been appointed in this capacity.
The parent is representing the child because the child is a bona fide
member of the superannuation fund and has had contributions made on his/her
behalf. The parent may not have been appointed as the child's personal
representative.
Ceasing business
SLAB No.3 does not address the problems occasioned by the split of a
superannuation fund in circumstances where the members of the fund were
once in business and now have ceased carrying on a business. Current regulations
result in the split of the fund with costs to the members, also causing
a reduction in the amount of retirement income.
Changes in residency status
Reference is made to comments above in paragraphs 17 – 19 about
a change in residency status where you have a member who becomes a non-resident
and that fund becoming a non-resident non-complying fund. SLAB No.3 should
be amended to ensure that there is a mechanism for such funds to have
a transition period for compliance.
Payment of life time pensions
SLAB No. 3 presents a difficulty for superannuation funds that are paying
lifetime pensions. The difficulties arise when the link is broken in sub-section
6 of the SIS Act, causing an unwinding of such pensions, leading technically
to a breach of contracts entered into already with members of the fund.
It is recommended, therefore, that SLAB No.3 be amended to include a
grandfathering provision where a SMF is forced to break a contract with
a life office in these circumstances. As Treasury would be aware, a complying
pension is often implemented through the purchase of a lifetime annuity.
Such lifetime annuities may not be easily transferable to another superannuation
fund.
Penalties imposed on the trustee and the members as a result of any change
to the superannuation fund due to this regulation should not be borne
by the member.
Trustees holding assets in their own names
For many superannuation funds, changing of the trustees causes great
costs and complexities, including stamp duty problems on change of ownership
of assets. In addition, APRA in the past, has indicated that the trustee
should be holding assets in their own names. The TIA, therefore, requests
that consideration of a custody arrangement be allowed in these circumstances.
Voting power of trustees
All trustees have equal voting power regardless of the assets value that
they have. In a company trustee context, the shares can be issued to reflect
the relative voting power of the members. For example, the father may
have 90% of the assets in a superannuation fund and the wife and children,
the remaining 10%. Those that hold 10% of the assets have effective control
over the entire fund including its investment strategies, investment decisions
and assets bought and sold. To this end, the TIA believes it is probably
inappropriate that voting power should not reflect members account balances.
Definition of “relative”
Attention should be given to the status of divorced couples and those
in same sex relationships within the definition of “relative”.
Item 32: (new section 36A) – Annual returns and retention of
records
It is noted that there is an inconsistency between the record retention
requirements under income tax laws (5 years) and the SIS Act (10 years).
The ATO has indicated a preferred position that superannuation funds
lodge combined superannuation and income tax returns. In the context of
the combined return, a trustee would have to determine which records and
documentation would be subject to either the 5 or 10 record retention
requirement.
To avoid this confusion, as well as the additional compliance costs,
it is recommended that the record keeping retention requirements of the
SIS Act be brought into line with taxation laws (i.e., a reduction of
the 10 year period to 5 year period).
Item 37: (new section 42A) – Complying superannuation fund
New section 42A sets out the circumstances where an entity that has been
a SMF at any time during a year of income is considered to be a complying
superannuation fund. In looking at the matters which the Commissioner
has regard to in determining the operation of this section, it is recommended
that the Commissioner should also have regard to the effect on retirement
incomes for the member, as well as the circumstances where the trustees
have not all agreed or consented to an act by one or more of the trustees
to cause the fund to become non-complying.
For example, there could be a fraud on the minority or a fraud on the
majority by one or two of the trustees. If the quorum for a meeting of
trustees is considered to be only two, then two trustees commit all of
the members and trustees to a course of action. Accordingly, there may
be circumstances where the Commissioner needs to have regard to the fact
that there are still effectively innocent members.
Item 43: (new section 106A) - Notice to the Commissioner on change
of status
This provision, which requires that notice of a change of status must
be made not later than 21 days after the trustee first has knowledge that
the superannuation fund has ceased to be a SMF, suffers from two main
problems:
- there is no indication as to how a determination is made when a trustee
first has knowledge of change of status; and
- the 21 notification period is inadequate.
It is recommended that this provision be amended so that notice of change
of status of a small superannuation fund is made on or at the time of
the lodgment of the required return. This is consistent with the timing
of other notification provisions in the taxation laws.