Superannuation Update February 2008 - General update

Superannuation guarantee – changes to the calculation of minimum SG contributions

A reminder that significant amendments to legislation commence on 1 July 2008 which affect how the minimum amount of compulsory superannuation guarantee contributions are calculated by employers.

While the changes will not affect all employers, employers will need to ensure that the level of superannuation contribution they are currently making is equivalent to at least nine per cent of an employee’s ordinary time earnings. If not, the level of superannuation contributions will need to be adjusted from 1 July 2008. If an adjustment is required but not made, significant penalties may apply.

Please refer to our article on changes to the calculation of minimum SG contributions for further details.

Enhanced protection of superannuation entitlements

The Corporations Amendment (Insolvency) Act 2007 (Corporations Act) commenced on 31 December 2007.

This Act seeks to enhance the protection of employees’ unpaid superannuation contributions and superannuation guarantee charge in the event of an employer going into liquidation, administration or receivership after 31 December 2007.

The amendments to the Corporations Act are:

• clarification that a superannuation guarantee charge has the same priority as an employee’s unpaid wages and unpaid superannuation contributions in the event of insolvency, and
• a requirement that all deeds of company arrangements apply the priorities which are prescribed by the Corporations Act.

First Home Savers Accounts

The Treasurer, the Hon Wayne Swan MP, and the Minister for Housing, the Hon Tanya Plibersek MP, have announced Cabinet’s formal approval for establishment of First Home Savers Accounts to help eligible first home buyers save for their first home.

Under the proposal:

• eligible individuals may make contributions to their First Home Savers Account (account) of up to $10,000 each year (which will be indexed)
• the government will make an additional contribution to an individual’s account based on up to $5,000 of individual contributions each year. The contribution level will be the greater of:

1. 15 per cent of the contributions made, or
2. the account holder’s marginal income tax rate less 15 per cent.

• contributions must be after tax and will not be subject to tax when contributed to an account
• investment earnings will be taxed at 15 per cent
• withdrawals to buy or build a first home to live in will be tax-free
• an individual can close their account and transfer the balance to their superannuation. The balance could then be accessed through superannuation early release provisions
• public offer superannuation funds will be able to offer the accounts (along with other financial institutions), and
• superannuation funds who want to offer the accounts must set up a separate trust to do so (among other requirements).

The government has released a February 2008 'Outline of proposed arrangements' and is seeking comments by 7 March 2008.

Increase in TPD claims

Business Review Weekly has reported that litigation of disputed total and permanent disablement claims from superannuation funds are increasing in number and look set to increase further in response to the reform of tort law for personal injury litigation in recent years.

Trustees should note the growing focus on these type of claims and check that their insurance policies and claim processes are up to date and being followed correctly.

New condition of release: ‘terminal medical condition’

With effect from 16 February 2008, the Superannuation Industry (Supervision) Regulations 1994 (Cth) have been amended to include a new condition of release (that is, a circumstance in which there is no regulatory restriction on a member of a superannuation fund accessing his or her benefit). The new condition of release is a member suffering from a ‘terminal medical condition’.

Satisfying the new condition of release

Assuming that the trustee has power to pay a ‘terminal medical condition’ benefit, this condition of release is satisfied if:

1. two registered medical practitioners have certified, jointly or separately, that the member suffers from an illness or has incurred an injury that is likely to result in the death of the member within a period (the ‘certification period’) that ends not more than 12 months after the date of certification
2. at least one of the registered medical practitioners is a specialist practising in an area related to the illness or injury suffered by the member, and
3. for each of the certificates, the certification period has not ended.

Importantly, a lump sum payment to a person with a terminal medical condition is tax free. Contrast this with the position of a member in respect of whom a death benefit is paid to a non-dependant—this can be taxed at up to 31.5 per cent.

What should superannuation fund trustees do?

Each superannuation fund trustee should consider whether fund benefits should be able to be accessed when a member has a ‘terminal medical condition’.  If so, the trustee should have regard to the following things: 

Checking the trust deed

The trust deed should be checked to establish whether:

1. the trustee has power to pay benefits under the new condition of release, and
2. the trustee is required to pay a benefit if the new condition of release is satisfied.

Amendments to the trust deed

If the trust deed does not provide the power to release benefits under the new condition of release, the trust deed needs to be amended.

Special form

Members claiming release of their benefit on the ground that they have a ‘terminal medical condition’ will need to provide the appropriate supporting information – we recommend that a special form be developed for this purpose. 

Insurance

The trustee should check their current insurance cover in the light of this new condition of release and, in doing so, pay particular attention to the limits imposed by the sole purpose test.

Disclosure

The trustee would need to update the fund’s product disclosure statement and communicate the change to its existing members.

Systems

The trustee would also need to ensure that their systems are updated to reflect the new condition of release. Note that any benefit accrued after the certification period ends is not covered by this new condition of release.

More information

For information regarding possible implications for your business, contact a member of the Financial Services team.