CHAPTER 10
LIABILITY
Introduction
10.1 Section 32V of Taxation Laws Amendment Bill (No. 7) 1997, Schedule
5 states:
an employer is not liable to compensate any person for loss or damage
arising from anything done by the employer in complying with this part.
10.2 The purpose of this clause is to provide protection for employers
from liability to compensate any person for loss or damage arising from
anything that the employer might do in complying with the choice of fund
requirements. For example, if an employee selects a fund from material
provided by the trustee or RSA provider through his or her employer in
compliance with the choice of fund requirements, and the fund subsequently
performs badly, the employer would not be liable to compensate the employee.
[1] The Committee received evidence about two
aspects of the liability clause:
- constitutionality of the clause
- limits to liability protection.
Constitutionality of 32V
10.3 The Committee received two submissions, one from Mr George
Raitt of Blake Dawson Waldron and another from the Chairman of the Law
Council Superannuation Committee, Mr John Morgan, both of which cast doubt
on whether section 32V is constitutional. Mr Raitt's submission incorporated
an opinion from Mr Dennis Rose, AM QC that:
...the High Court would hold Section 32V to be beyond the Commonwealth's
constitutional powers. I would expect Section 32V to be wholly invalid,
since there will be no acceptable way of reading it down so as to leave
it applying only to employers that were trading or financial corporations
... [2]
10.4 In brief, Mr Rose's opinion is based on an assertion that Section
32V would not have a sufficient connection with taxation to be valid.
A copy of Mr Rose's opinion is attached at Appendix D.
10.5 The basis for Mr John Morgan's opinion was slightly different. Mr Morgan
submitted to the Committee:
... we are concerned that clause 32V of the Bill is unconstitutional
in that it involves another matter in a law relating to taxation. [3]
10.6 Mr Morgan recommended that the matter be referred to the Attorney-General
for opinion and, if the Law Council Superannuation Committee's concerns
were found to be justified, other steps taken to ensure that employers
are not exposed to legal risk in the choice of funds environment. [4]
10.7 However, Mr Morgan advised the Committee that, provided an employer
gives no more information than is required under the legislation, it is
difficult to envisage in what circumstances an employer would be responsible
for the poor performance of a fund.
10.8 He said the situation may be different if the employer negligently
or deliberately gave incorrect information or advice about the performance
or investment profile of the fund.
10.9 In Mr Morgan's view, Section 32V will only apply to those matters
that the choice of fund provisions require the employer to do:
Anything which the employer does in addition to those requirements,
or which represents an omission from those requirements, will carry
the same potential liabilities for the employer as the employer would
otherwise have borne in the absence of this Section. [5]
10.10 The Committee sought advice from representatives of the Australian
Taxation Office concerning the opinions about Section 32V. Mr Neil Olesen,
Assistant Commissioner, Australian Taxation Office, advised the Committee
that the office had sought advice from the Australian Government Solicitor
on the question of the constitutionality of the provision and:
...their advice to us was that there was a reasonable prospect that
the provision would be found to be constitutionally valid. [6]
10.11 The Committee sought a copy of the advice from the AGS to the ATO.
Mr Olesen referred the matter to the Minister and, to date, the Committee
has received no response.
10.12 Mr Olesen later added to his answer in a manner that indicated
to the Committee that the case for including Section 32V may be overstated
in any case. Mr Olesen reminded the Committee:
... an employer will face normal common law obligations in selecting
a fund for an employee, as they do at the moment, and as they have done
for a long time where there is not an award obligation. Those things
have not changed and have always been present. To the extent that some
people fear those possible liabilities might become greater under this,
we think it is pretty easy to overstate the possibility of an employer
being liable for damages. [7]
10.13 Mr Michael Monaghan, Deputy Commissioner, ATO, reinforced Mr Olesen's
comments. Mr Monaghan told the Committee:
... people are overlooking the fact that employers are now making choices
about what superannuation fund to put their employees in, in many cases.
So there is already in existence the issue you raise. [8]
10.14 Regardless of the validity of Section 32V, employers need to be
aware that they have a common law liability to exercise care when selecting
funds for employees. This liability cannot be legislated away.
10.15 The Committee accepts the evidence of Mr Monaghan and Mr Olesen
that the case for employer liability protection may well be overstated.
As Mr Olesen noted, `the prospect of an employer being liable ...
is fairly slim'. [9]
10.16 However, the Committee understands that the Government included
Section 32V as a method of allaying employer concerns about the possibility
that choice of fund may expose them to liabilities in respect of the choices
they offer their employees. Having obtained this concession from the Government,
the Committee expects that employers as a whole may well be disturbed
by opinions such as those offered by Mr Rose about whether the clause,
in fact, offers any protection.
10.17 The Committee urges the Government to resolve this issue quickly.
The Committee believes that it would be in the interests of the Government
and employers for the opinions from the Australian Government Solicitor
concerning the constitutionality of the legislation to be made available
for parliamentary scrutiny prior to passage of the legislation.
The limits of liability
10.18 The Committee considers that it is likely that a choice of fund
initiative will lead to increased demand for advice from employees who
are faced with decisions that they must make concerning their choice of
superannuation fund come 1 July 1998. The Committee received confirmation
from several witnesses that this is a likely scenario.
10.19 Under such a scenario, it is likely that employees will seek advice
on an informal basis from their employers, from shop stewards, foremen
and fellow workmates. The Committee understands that there is some concern
that that employers, particularly small employers and others such as union
officials may not be aware that they may be exposed to liability claims
if they give such advice. Further, there is some evidence that a dealer's
licence may be required for the provision of investment information.
10.20 The problem of liability for unlicensed advice extends beyond employers.
Union officials or employer representatives promoting industry funds for
example may well find themselves in the same situation. The Committee
asked Ms Sally O'Loughlin of the CPSU about whether union officials
might have to obtain a dealer's licence under the new choice environment.
Ms O'Loughlin replied:
If I thought I was being put in a position where I would have to give
that sort of advice and would need a dealer's licence to do it, I suspect
I would probably not be a union official very much longer; it is not
my chosen career path. I think there is a very real concern for employers
about what level of advice we need to give to people and whether that
puts us in some sort of de facto financial advisory capacity. Clearly,
it is not any employer's wish, I would have thought, to be in that capacity.
You have this terrible conundrum. [10]
10.21 The Committee sought information from the ATO and the ISC on this
issue. The information provided by the ISC appears to indicate that this
may be a valid area of concern, as the ISC proposes to include a prominent
warning in key features statements about where people should seek advice.
10.22 Mr John Larkin of the ISC advised the Committee that the ISC's
discussion paper released in December 1997 foreshadowed a statement to
be included in key features statements provided by funds to employees.
This statement will warn employees:
... if the employee had need of any information about the contents
of the KFS, he or she should not contact the employer, but rather contact
the fund trustee - and the telephone number was provided - or a financial
adviser. [11]
10.23 Mr Larkin concluded that this should be a `very prominent mechanism'
for ensuring that employees understand the channels for seeking financial
advice.
10.24 The Committee sought clarification from Mr Keith Chapman, Acting
Deputy Commissioner - Superannuation, ISC, concerning the requirements
for persons who provide advice about superannuation. Mr Chapman advised
that SIS Regulation 3.10 provides a schedule of individuals who can receive
commission from trustees for the provision of advice and includes:
- licenced advisers under the Corporations Law;
- a number of incidental providers (eg: Accountants and solicitors);
and
- life insurance companies.
10.25 Mr Chapman confirmed that life insurance agents are subject to
the Life Insurance code of conduct, which is currently administered by
the ISC. Other intermediaries, such as trustees, licenced dealers, investment
advisers and accountants are fully regulated under the licencing provisions
of the Corporations law. However, the application of the licencing provisions
can vary in their application to different classes of persons, for example,
trustees of non-public offer funds and accountants who are providing superannuation
advice incidental to tax or accounting advice. [12]
10.26 The Committee considers that education material provided to employers
and employees and others about choice of fund should include "health
warnings" about the proper channels for seeking and giving advice.
The Committee notes and accepts that the Government has considered this
issue and is taking appropriate steps to ensure that people do not inadvertently
give advice, as they have no protection against future liability claims
if such advice proves to be poor. It is important that employers, in particular,
understand the limits of the protection provided by Section 32V.
Footnotes
[1] Explanatory Memorandum, p. 69.
[2] Submission, Mr George Raitt. Attachment
page 3.
[3] Submission, p. 1.
[4] Submission, p. 1.
[5] Submission, paras. 5.1-5.4.
[6] Evidence, p. 420.
[7] Evidence, p. 442.
[8] Evidence, p. 443.
[9] Evidence, p. 442.
[10] Evidence, p. 370.
[11] Evidence, p. 422.
[12] Correspondence from Mr Keith Chapman,
Acting Deputy Commissioner - Superannuation, ISC, to the Chairman of the
Committee, Senator John Watson, 24 March 1998.
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