Just when you thought it was safe to take a breather following 1 July, there are some other statutory changes and refinements to keep you busy for the rest of this year.
Decide whether to accept TFNs from former members
Where no-TFN tax has been paid, and a beneficiary subsequently quotes his or her TFN to the fund, the fund must apply for a tax offset to recover the no-TFN tax and must then reimburse the member for tax deducted from his or her account or benefits. This will be problematic where the member has left the scheme, leaving the scheme with the administrative burden of tracing former members and/or large amounts of unallocated tax offset amounts.
While the Superannuation Industry (Supervision) Act 1993 (SIS)1 allows a beneficiary (or an applicant to become a beneficiary) of a superannuation fund to quote his or her TFN to a trustee in connection with the operation of the Act, there is no express (and in our view no implied) obligation on the trustee to accept that quotation once the person ceases to be a beneficiary - that is, leaves the scheme.2
Accordingly, the fund can refuse to accept a former member’s quotation of TFN unless he or she re-applies to become a member.
Decide whether to update your PDS to reflect the implementation of the Better Super changes introduced on 1 July3
A PDS must be up to date at the time of issue. If your PDS does not contain details of the changes, it will not be up to date and will be defective4 and the trustee commits an offence if it gives a copy of the defective PDS.5
If your PDS contained a fair description of the budget proposals, referring to the proposed implementation date of 1 July 2007, this should be adequate, and the PDS need not be updated specifically on account of the actual introduction of the changes.
If your PDS contains no description of the changes (at either proposal or implementation) it should be updated as a matter or urgency.
Notify existing members of the implementation of the Better Super changes
The changes are a ‘significant event’ as they are matters that would have been required to be specified in a PDS6 and notice of the fact that they have become law must be given. This notice must be communicated within 12 months, since it is not adverse to the previous information given to the member.7 Notice must be given no later than the next member statement/annual report.8
Prepare to update your administration procedures to reflect the harmonisation of the periods to report breaches to ASIC and APRA
The current mismatch of breach reporting in section 912D of the Corporations Act and section 29JA of SIS will be replaced, from 1 January 2008, with a single breach reporting obligation where there is both a breach of SIS and FSR licensing requirements.
The Financial Sector Legislation Amendment (Simplifying Regulation and Review) Bill 2007 (when enacted) will replace the current dual reporting with an obligation to report to APRA.
The criteria for determining whether a reportable breach has occurred and time for reporting of breaches will be aligned:
- Only significant breaches must be reported, rather than the current SIS approach of requiring reporting of all breaches.
- The timeframe for reporting will be 10 business days.
However, there is still a difference in the reporting standards in that for breaches of SIS, reporting is required where the licensee has breached or ‘shall breach’ (that is, a breach has occurred, or will necessarily occur) but for breaches of the Corporations Act, reporting is required where the licensee has breached or ‘is likely to breach’. This is a consequence of a deliberate policy, intended to reflect the differences between prudential, and corporate and financial services, legislation.
A report lodged with APRA will be taken to have been lodged with ASIC9 and this will minimise the need to dual report and will significantly reduce the number of reports required to be delivered to ASIC. Note, however, that not all breaches of FSR requirements (that are reportable to ASIC) are reportable to APRA (since not all FSR requirements are conditions of an RSE licence).10 Some reporting to ASIC will therefore still be required.
Prepare to cite your ABN
The Financial Sector Legislation Amendment (Simplifying Regulation and Review) Bill 200711 also rationalises the citation of identifier numbers for trustees and funds in documents that it gives to APRA or in which it identifies itself as an RSE licensee of a registrable superannuation entity.
The amendments are aimed at achieving the long term objective of making the Australian Business Number (ABN) the sole business identifier for all persons and entities in their dealings with the government and its agencies.
The amendments replace the requirement for APRA to allocate, and entities to display RSE licence and registration numbers with a requirement to display the trustee’s and fund’s ABN.
This change takes effect 12 months after the Bill receives Royal Assent. This is intended to allow trustees and funds that do not currently have an ABN to obtain one, in compliance with the new SIS obligation that the RSE licensee must have an ABN for itself and each registrable superannuation entity of which it is an RSE licensee.12
Implement changes to the treatment of superannuation contributions in Bankruptcy
The Better Super provisions and the High Court decision in Cook v Benson13, have resulted in two significant changes to the treatment of superannuation on bankruptcy.
Consistent with the abolition of Reasonable Benefit Limits (RBLs), the restriction as to the amount protected from bankruptcy14 to the pension RBL is removed by amendments contained in the Superannuation Legislation Amendment (Simplification) Act 2007. There is now no restriction on the amount protected on bankruptcy.
Treatment of protected contributions
The treatment of contributions made in circumstances in which they are protected are altered with the Bankruptcy Legislation Amendment (Superannuation) Contributions Act 2007. In Cook v Benson, the High Court held that a contribution by the member was in return for consideration from the trustee and so was not a gift. It was protected from bankruptcy under the settlement clawback provisions.
The Act introduces two provisions (commencing on 28 July 2006) providing for when contributions may be set aside.15 Each contains common elements:
- The property would probably have become part of the transferor’s estate had the contribution not been made.
- The transferor’s main purpose was to prevent the property becoming divisible amongst his or her creditors or hinder or delay the process of making available property available for distribution.
- The transfer, having regard to the pattern of contributions, was out of character.
- At the time of transfer it can reasonably be inferred from all the circumstances that the transferor was, or was about to become, insolvent.
The first16 applies where the bankrupt is the contributor. The second17 applies where the bankrupt is a party to a contribution scheme. Therefore, the pattern of contributions is the key test.
There is a strong incentive to make regular contributions if one is potentially exposed to claims that might lead to bankruptcy.
Trustees also need to be aware of the new superannuation account freezing notice provisions.18 The Official Receiver may give the trustee notice freezing the account.
Importantly, the notice comes into force immediately when the notice is given to the trustee.19 Thus, trustees will need procedures to make sure that there is immediate recognition of such a notice, as otherwise there is the risk that the bankrupt may already have in train a claim for payment which, if satisfied after the notice is received, would mean the trustee is potentially liable directly to the Official Receiver.
Where there is a direct payment to the bankrupt, the prospect of recovery is remote.
It would appear there is no need to notify the member, as the Official Receiver has a notification obligation.20
Notices are intended to operate for 180 days to allow either the agreement presumably of the bankrupt to making payment to the trustee in bankruptcy or the giving of a notice to pay21 by the trustee in bankruptcy.
These new account freezing notice provisions commence on 16 October 2007.
Decide whether to take advantage of the new ability to borrow
Schedule 3 of the Taxation Laws Amendments (2007 Measures No. 4) Bill 2007 somewhat surprisingly amends Section 67 of SIS. It is hardly a law to do with taxation.
A fund may now borrow so long as the rights of the lender are limited in recourse to the asset (or replacement asset) the subject of acquisition with the borrowed funds. Type of asset is not restricted.22
Provided lenders are willing to lend on these terms, it opens up the ability of trustees to acquire assets using leverage.
Update your self managed superannuation fund (SMSF) trust deed
Since the introduction of SIS, requiring an election to comply with that legislation, there has not been a real need to update trust deeds. Generally speaking, any changes would either fall within the existing terms of a well-drafted deed or one could rely on the typical deemed compliance with SIS provision clause.
The main exceptions to this are term allocated pensions and transition to retirement pensions, as these were not contemplated in 1994.
The flexibility created by the new account based pensions and tax free status of pension assets after 60 should mean a significant increase in the use of pensions and transition to retirement pensions.
The SIS Regulations23 require for a pension that it is provided for under the rules of the fund. This requires the trust deed, at the very least, to expressly provide for such a pension and that the pension is subject to the SIS rules.
It is unlikely that a typical deemed compliance with SIS clause can be relied on to achieve this.
Generally speaking, deeming provisions only apply to the extent that changes in the law override inconsistent provisions in the trust deed.
Where the change in the law is permissive, rather than mandatory, such as the new pension rules or the removal of the cashing rules, then there is no scope for the operation of such a deeming clause. The abolition of compulsory cashing also raises the prospect of non compliance with a deed, in circumstances where there is certainly no breach of the law.
It would be prudent for trustees to consider whether there is the need to update the trust deed.
Make a trustee declaration when you establish a new SMSF
From 1 July 2007, a person who becomes a trustee or a director of a trustee of a self managed superannuation fund must make a declaration in an approved form, that he or she understands his or her duties as trustee (or as director).24
It must be made no later than 21 days after becoming a trustee or director.
In addition, there is an obligation on existing trustees/directors to ensure it is made.
It is an offence of strict liability which if breached attracts a penalty of 50 penalty units.25
The declaration needs to be kept with the trust records.
The new form is available on the ATO website:
Footnotes: 1 Section 299D of the Superannuation Industry (Supervision) Act 1993. 2 Section 299H only applies to beneficiaries. 3 Section 1012J of the Corporations Act. 4 Section 1021B of the Corporations Act. 5 Sections 1021D and 1021E of the Corporations Act. 6 Section 1017B(1A) of the Corporations Act. 7 Section 1017B(6) of the Corporations Act. 8 Section 1017D(5)(f) of the Corporations Act. 9 Section 912D(1C) of the Corporations Act, as inserted by section 171 of the Financial Sector Legislation Amendment (Simplifying Regulation and Review) Bill 2007 (Bill). 10 Under section 38A of SIS. 11 Sections 248 and 249 of the Bill, amending section 29DC of SIS. 12 Sections 250 and 251 of the Bill, inserting new sections 29E(1)(ba) and (ea) of SIS. 13 Cook v Benson (2003) HCA 36. 14 Section 116 of the Bankruptcy Act 1966. 15 Sections 128B and 128C of the Bankruptcy Legislation Amendment (Superannuation) Contributions Act 2007 (BLASCA). 16 Section 128B of BLASCA. 17 Section 128C of BLASCA. 18 Section 128E of BLASCA. 19 Section 128E(5) of BLASCA. 20 Under section 128G of BLASCA. 21 Under section 139ZQ of the Bankruptcy Act 1966. 22 Sub-section (4A) of SIS. 23 SIS Regulation 1.06(1)(a). 24 Section 104A of SIS. 25 Section 104(3) of SIS.
1 Section 299D of the Superannuation Industry (Supervision) Act 1993.
2 Section 299H only applies to beneficiaries.
3 Section 1012J of the Corporations Act.
4 Section 1021B of the Corporations Act.
5 Sections 1021D and 1021E of the Corporations Act.
6 Section 1017B(1A) of the Corporations Act.
7 Section 1017B(6) of the Corporations Act.
8 Section 1017D(5)(f) of the Corporations Act.
9 Section 912D(1C) of the Corporations Act, as inserted by section 171 of the Financial Sector Legislation Amendment (Simplifying Regulation and Review) Bill 2007 (Bill).
10 Under section 38A of SIS.
11 Sections 248 and 249 of the Bill, amending section 29DC of SIS.
12 Sections 250 and 251 of the Bill, inserting new sections 29E(1)(ba) and (ea) of SIS.
13 Cook v Benson (2003) HCA 36.
14 Section 116 of the Bankruptcy Act 1966.
15 Sections 128B and 128C of the Bankruptcy Legislation Amendment (Superannuation) Contributions Act 2007 (BLASCA).
16 Section 128B of BLASCA.
17 Section 128C of BLASCA.
18 Section 128E of BLASCA.
19 Section 128E(5) of BLASCA.
20 Under section 128G of BLASCA.
21 Under section 139ZQ of the Bankruptcy Act 1966.
22 Sub-section (4A) of SIS.
23 SIS Regulation 1.06(1)(a).
24 Section 104A of SIS.
25 Section 104(3) of SIS.
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