Many legislative changes will take effect on 1 July 2008 – how are you going with your preparations?
We set out below a reminder of the key changes taking effect on 1 July 2008.
If an employer is currently using a concessional earnings base for its employees, the employer’s SG Act obligations in respect of those employees will most likely increase from 1 July 2008.
- For accumulation-style members, this will result in higher contributions. If contributions need to be increased, this could mean that:
- for remuneration packages expressed to be ‘inclusive’ of superannuation, an employee’s ‘take-home pay’ will be reduced, and
- for remuneration arrangements which are exclusive of superannuation, additional costs will be incurred by the employer.
- For a defined benefit fund, the actuary’s benefit certificate will continue to be used to determine whether there is a ‘shortfall’ in respect of employees for SG Act purposes. Of course, reliance on the actuary’s certificate is only possible if the certificate is based on accurate information which means that the certificates will have to be reissued on the basis of OTE if another earning base is presently being used. As with accumulation members, this could result in higher employer contributions being required.
We understand that the Australian Institute of Actuaries is working with the government to iron out the details of the new SG Act regulations which will be relevant to the issuance of the new benefit certificates.
Trustees of defined benefit funds will also want to ensure that the change to OTE does not affect the fund’s funding position. The trustee may also need to obtain actuarial advice on this issue.
Employers should also note the transitional period for minimum insurance requirements for SG default funds ends on 30 June 2008. Therefore, from 1 July 2008, a default fund which is used by an employer for SG purposes must meet the prescribed minimum level of insurance, unless an exception applies.
Corporations Act 2001 section 1012IA
The much anticipated (and debated) section 1012IA of the Corporations Act 2001 (Corporations Act) commenced on 1 July 2007, but will not fully operate in respect of existing funds until 1 July 2008 (unless a new PDS is prepared for the fund before that date).
Section 1012IA is designed to ensure that members are given enough information about any underlying accessible financial products (AFPs) to help them make an informed assessment of the investment strategies offered by the super fund. In essence, this requires trustees to provide members with information equivalent to that which the member would receive if the member invested directly in the AFP.
Corporations Act section 1015D in-use notice changes
Currently, an in-use notice must be lodged in respect of any PDS and any Supplementary PDS.
From 1 July 2008, the Corporations Legislation Amendment (Simpler Regulatory System) Act 2007 provides that this will no longer be the case. Instead, the trigger for lodging an in-use notice will be the following events:
- the first use of a PDS
- a change to the fees and charges set out in the PDS, or
- the financial product to which the PDS relates ceasing to be available.
An in-use notice may be lodged electronically or in hard copy from 1 July 2008 and must be lodged electronically from 1 January 2009.
Insurance and compensation arrangements
Corporations Regulations 7.6.02AAA sets out the new requirements for compensation arrangements for AFS licensees providing financial services to retail clients pursuant to section 912B of the Corporations Act.
For existing licensees, from 1 July 2008 the licensee must hold professional indemnity insurance cover that:
- is adequate having regard to:
- the licensee’s membership of an external dispute resolution scheme, taking account of the maximum liability that has a realistic potential of arising in connection with any particular claim against the licensee and all claims in respect of which the licensee could be found to have liability, and
- other relevant considerations in relation to the licensee, including the volume of its business, the number and kind of its clients, the kind of business and the number of authorised representatives, or
- is approved by ASIC as an alternative arrangement.
ASIC Regulatory Guide 126 entitled ‘Compensation and insurance arrangements for AFS licensees’ details ASIC’s implementation of the new compensation requirements under section 912B of the Corporations Act. On 28 March 2008, ASIC released an updated version of this Regulatory Guide to clarify various issues, including reinstatements and the scope of coverage required for fraudulent and dishonest acts.
ASIC will be administering the new requirements in a staged approach:
- Minimum standards (as set out in the Regulatory Guide) will apply to existing trustees from 1 July 2008 (1 January 2008 for new trustees) during the ‘implementation period’. The implementation period will run from 1 January 2008 to 31 December 2009.
- From 1 January 2010, all licensees will be expected to comply with the higher standards as detailed in the Regulatory Guide.
Trustees of superannuation funds should act quickly to confirm whether their existing professional indemnity insurance satisfies the implementation period policy requirements from 1 July 2008 (which are detailed in Table 5 of the Regulatory Guide). Trustees should also be mindful of the more extensive requirements which will operate from 1 January 2010 in renegotiating any new policies.
Warning regarding negative returns
Given the recent volatility in the investment markets, it is important for trustees of superannuation funds to be mindful of their powers regarding earnings rates.
All superannuation fund trustees should examine their fund’s trust deed to confirm whether they have the power to adjust members’ accounts for negative earnings. The answer to this question will depend on the exact wording of each trust deed.
For example, in the recent case Vision Super v Poulter [2006] FCA 849 (Vision Super), Justice Young considered the meaning of ‘interest’ under a superannuation fund trust deed and determined that ‘interest’ must be a positive amount. Justice Young applied the ordinary meaning of ‘interest’, which he determined to be ‘the return or compensation for the use or retention by one person of a sum of money belonging to or owed to another’. Justice Young found that this ‘language suggests that … interest … is intended to be a positive sum’. In addition, it was found that other references in the fund’s trust deed to an interest bearing account and adding interest to an account implied that the trust deed had adopted the ordinary meaning of interest.
Given this interpretation of interest, some funds’ trust deeds will not empower the trustee to declare a negative earning rate. There are also other terms which could have the same connotation.
As this is the first time since the Vision Super case when there has been a period of negative returns, many trustees will not have faced this issue before. We recommend that each superannuation fund trustee analyse their trust deed to determine whether adjustments can be made to members’ accounts and benefits for negative earnings during this downturn in the markets.
An inability to declare negative returns will mean that the trustee must determine how it will account for these changes and what options it has.
There are also particular issues for funds with a unitised structure and whether they can observe any prohibition on adjustment for negative earnings.
Legal professional privilege update
The Australian Law Reform Commission has issued its Final Report ‘Privilege in Perspective: Client Legal Privilege in Federal Investigations’ which reviewed the operation of legal professional privilege in federal investigations in the light of the recent growth in the number of federal bodies with coercive information-gathering powers.
The report states that current legislation applicable to different federal bodies is inconsistent and rarely deals sufficiently with the application of legal professional privilege to the investigation process.
The key recommendation in the report is the enactment of a statute of general application to cover the operation of legal professional privilege in federal investigations and develop procedures for claiming privilege. The report notes strong opposition to its earlier suggestion that in-house counsel be required to provide particulars of independence in relation to a claim of legal professional privilege.
The Attorney-General is considering the government’s response.
More information
For information regarding possible implications for your business, contact a member of the Financial Services team.