There is some good news for superannuation funds in the Federal Government's Mid-Year Economic and Fiscal Outlook 2012-13, or the 'Mini Budget' as it is commonly known.
'Crystallisation' not to occur in fund mergers
To the consternation of the superannuation industry, the Australian Taxation Office (ATO) expressed a view in 2011 that, where a member's interest is transferred under a fund merger, the tax free/taxable components under the proportioning rule are 'crystallised'. If that view were correct, this could result in members whose interests are transferred pursuant to a successor fund transfer 'losing' some of their tax free component where the value of that tax free component is greater than the value of their benefits (for example, due to poor returns). The ATO indicated that the industry's current practice (not to apply the proportioning rule upon successor fund transfers) could continue pending the announcement by the ATO of a concluded view. Since that time, industry associations, professional groups and a number of funds have made submissions to the effect that the ATO's view is incorrect or, if its view is technically supported by the legislation, that the legislation should be amended.
The Government has now announced that crystallisation under the proportioning rule will not occur where the member's interest is transferred beyond the control of that member (for example, under fund mergers). This is a welcome change that removes a potential impediment to fund mergers.
However, it is disappointing that the proposed start date for this measure appears to be 1 July 2013. It is hoped that the Government will clarify that the change applies to all successor fund transfers, regardless of their timing, consistently with established industry practice.
SuperStream start date deferred
Funds struggling under the sheer volume of regulatory changes required to be implemented in the next couple of years have been given some relief, with the start date for SuperStream to be deferred from 1 July 2013 to 1 January 2014.
No such relief has been granted to employers, with the Government committing to its prior announcement that it will mandate electronic contributions from medium and large employers from 1 July 2014.
Pensions and 'pension phase' no longer to cease on the death of a member
Another contentious position of the ATO in recent times relates to whether a member's pension ceases immediately upon death. Under the ATO's current view, upon the death of a member in receipt of a pension, in the absence of a reversionary pensioner or binding pension nomination, that pension will cease. This can have a significant effect on funds in calculating which assets are in 'pension phase', especially for large funds which are often not informed of the member's death for some time.
In a welcome clarification of the law, the Government has announced that the tax exemption for earnings on assets supporting superannuation pensions is to continue following the death of a fund member in the pension phase until the deceased member's benefits have been paid out of the fund.
The tax exemption is to apply on the basis that the member's benefits will be paid out as soon as practicable, with the exemption to cease after that time. This unspecified end date to the pension phase could lead to some uncertainty, but the measure is certainly an improvement on the ATO's current view.
The start date for this measure is 1 July 2012. Again, it would be preferable if the start date for this measure was backdated further, to ensure that the law aligns with previous industry practice.
More super to be transferred to the ATO
The thresholds for the automatic transfer of 'inactive' super accounts and accounts of 'lost' members are to change from 31 December 2012, with the result that more accounts will be transferred to the ATO. The maximum account balance has been increased from $500 to $2,000 and the period of inactivity has been reduced from five years to 12 months.
Interest at a rate equivalent to increases in the Consumer Price Index will be paid by the Government on such accounts.
Member protection regulations to be repealed
The Government has announced that it will repeal the member protection regulations from 1 July 2013 (consistent with the recommendation from the Super System Review (Cooper Review)).
Members with small inactive accounts will now be covered by the new lost member account provisions (referred to above).
The SuperStream component of the supervisory levy for Australian Prudential Regulation Authority regulated funds will be reduced over the next six years, while the self-managed superannuation fund (SMSF) levy will be increased from 2013-14 (from $191 to $259). In addition, the SMSF levy will be 'brought forward' so that it is payable in the year of income rather than in the subsequent year.
© DLA Piper
This publication is intended as a general overview and discussion of the subjects dealt with. It is not intended to be, and should not used as, a substitute for taking legal advice in any specific situation. DLA Piper Australia will accept no responsibility for any actions taken or not taken on the basis of this publication.
DLA Piper Australia is part of DLA Piper, a global law firm, operating through various separate and distinct legal entities. For further information, please refer to www.dlapiper.com