Last Minute Changes to Simple Super Regulations by Jenny Willcocks & Todd Riley | July 2007 Area of Expertise | Superannuation & Collective Investments
Introduction 28 June 2007 saw the passing of the latest round of changes to the Superannuation Industry (Supervision) Regulations 1994 (SIS Regulations). The Superannuation Industry (Supervision) Amendment Regulations 2007 (No. 3) (SIS Amendment No. 3), introduced a number of last minute changes to the previous amendments relating to the 2006 Federal Budget Simpler Super (now “Better Super”) changes, which were: •
prohibiting trustees of chosen funds requesting employers to sign participation agreements;
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changing a trustee’s obligation to return certain contributions to the paying entity instead of the member; and
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some technical changes.
This article summaries these latest amendments and suggests actions that superannuation trustees should consider taking in light of the changes.
No Right to Require Participation Agreement A new regulation 7.04A has been inserted into the SIS Regulations that prohibits pubic offer superannuation funds from requiring a new employer sponsor of an existing member to enter into an agreement with the trustee before the fund accepts employer contributions on behalf of that member. This amendment only has limited application (i.e. it will only apply to existing members of a fund and not to new members who join after 1 July 2007). The consequences of this amendment are twofold: •
firstly, the trustee cannot enforce monthly contributions in the absence of an agreement that overrides the employer’s legal obligation to pay superannuation guarantee contributions quarterly; and
•
secondly, the trustee will have no power to recover arrears of contributions in the absence of an agreement with the new employer as to how much and how often it will contribute.
Administration systems and disclosure documents should be updated to reflect this change.
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Return of Contributions Prior to SIS Amendment No. 3, regulation 7.04 of the SIS Regulations required all returned contributions (i.e. non concessional contributions above the cap or contributions received where there is no tax file number held for a member) to go to the member regardless of the source of the contribution (e.g. an employer contribution that must be returned would have gone to the member and not to the employer). The amendment to regulation 7.04 requires returned contributions to be given to the person who made the contribution in the first place (e.g. an employer contribution that must be returned would go back to the employer). Without this amendment, members could have potentially incurred tax liabilities through no fault or action of their own (e.g. by exceeding their non consessional contribution cap). A superannuation trustee did not have the ability to deal with contributions in any other way.
Technical Updates - Better Super MINIMUM STANDARDS FOR PENSIONS AND ANNUITIES SIS regulations 1.05(11B) and 1.06(9D) specify when an annuity or pension will not meet the new minimum standards in the SIS Regulations. Prior to these amendments, annuities or pensions would have failed the minimum standards if, among other things, they could be transferred on the death of a member to a child of the deceased other than in accordance with regulation 6.21(2A) of the SIS Regulations. As a result of the amendments, if an annuity or pension transferred under regulation 6.21(2A) is not capped in accordance with regulation 6.21(2B) (e.g. the child reaches age 25 and is not disabled) it will not meet the minimum standards. This change appears to rectify an omission made from the original set of amendments to the SIS Regulations to reflect the changes required by the Better Super 2006 budget changes.
INDEXATION ARRANGEMENTS SIS regulations 1.05(12) and 1.06(11) are amended to allow a cap to be placed on increases in the annuities or pensions indexation arrangements related to the Consumer Price Index or other similar index.
DEFINED BENEFIT LIFETIME PENSIONS SIS regulation 1.06(9A) sets the minimum standards for pensions. As a result of the amendments, some defined benefit life time pensions will now meet minimum standards that would not have met those standards previously because they would have allowed commutations or variations or cessation of payments concerning the child of the deceased.
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SUCCESSOR FUND TRANSFERS OF DEFINED BENEFIT LIFETIME PENSIONS The amendments permit defined benefit lifetime pensions that meet the minimum standards under SIS regulation 1.06(9A) to be transferred to another complying superannuation fund on a successor fund basis, and still meet the minimum standards.
TRANSITION TO RETIREMENT The transition to retirement condition of release in Schedule 1 of the SIS Regulations has been updated from item 109A to item 110. Consequential reference updates have been made to regulation 6.15A, which specifies when certain benefits are taken to be unrestricted non preserved benefits.
CONTRIBUTION SPLITTING – PUBLIC SECTOR SUPERANNUATION FUNDS SIS Amendment No.3 also updates the definition of“untaxed splittable employer contributions”in the SIS Regulations to fix a drafting error. The definition has been amended to refer to contributions made by the Commonwealth, State or Territory to a public sector scheme that is not included in the assessable income of the entity. Previously, the definition had applied to contributions that were included in the assessable income of the superannuation fund, which would have meant the contributions would be taxable and would not make sense being defined as an “untaxed splittable employer contribution”.
Conclusion While these amendments resolved some issues with the Simpler Super regulations, the timing of their release allowed no time for funds to respond before 30 June 2007. In most cases systems would have already been in place and will now have to be changed adding to the cost of implementation. Trustees should review their product specifications, communications and administration systems to ensure that they are compliant. The introduction of regulation 7.04A has wider reaching implications. Not having a written agreement with some employer sponsors means some public offer superannuation funds will not be able to require those employers to contribute monthly which will ultimately reduce the member’s retirement benefit. It also prevents the trustee actively pursuing arrears of employer contributions on behalf of members as there will no longer be a contract between the trustee and the employer to enforce. This increases the risk of loss of employer contributions in the event of insolvency. While this change may allow more employees to direct Superannuation Guarantee contributions to their chosen fund, it also removes what has been a significant financial advantage and safeguard for members. The changes to the SIS Regulations concerning the return of contributions under regulation 7.04 are a welcome change and one requested by the industry. However, it will require last minute changes to processes which could have been avoided had the issue been addressed when first raised.
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For more information, please contact:
Jenny Willcocks Partner T: 03 8600 5001 jenny.willcocks@turkslegal.com.au
Todd Riley Senior Associate T: 03 8600 5031 todd.riley@turkslegal.com.au
Melbourne | Level 10 (North Tower) 459 Collins Street , Melbourne, VIC 3000 | T: 03 8600 5000 | F: 03 8600 5099 Sydney | Level 29, Angel Place, 123 Pitt Street, Sydney, NSW 2000 | T: 02 8257 5700 | F: 02 9239 0922
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