Superannuation Update February 2009

General update

The business of being a trustee – the latest on successor fund transfers

Freehills update

General update

Legislative update

Federal Parliament resumed on Tuesday 3 February 2009.

The House of Representatives plans to resume debate on the Tax Laws Amendment (2008 Measures No 6) Bill 2008¹. This Bill, among other things, amends the Superannuation Guarantee (Administration) Act 1992 (Cth) to vary the period within which an employer can make a superannuation contribution after each quarter’s due date and still elect to use the late payment offset to reduce their superannuation guarantee charge liability for the quarter.

The Tax Laws Amendment (Taxation of Financial Arrangements) Bill 2008² was passed by the House of Representatives on 11 February and was introduced to the Senate on 12 February. This Bill amends the Income Tax Assessment Act 1997 (Cth) by inserting Division 230, which defines ‘financial arrangement’ and sets out the methods under which gains and losses from financial arrangements will be brought to account for tax purposes.

Further, the Tax Laws Amendment (2009 Measures No 1) Bill 2009 was introduced into the House of Representatives on 12 February 2009 and has been referred to the Senate Standing Committee on Economics. Among other things, the Bill proposes to tighten the definition of ‘income’ used to determine eligibility for relevant government financial assistance programs for recipients below the Age Pension age. These amendments will aim to remove inconsistencies in the treatment of certain non-wage remuneration (including certain salary sacrifice contributions to superannuation) as income to ensure that individuals in equivalent situations are treated more fairly regardless of access to salary sacrifice. Reportable fringe benefits and net financial investment losses will also be added to the concept of income for affected programs.

Optional Capital Gains Tax roll-over for complying superannuation funds with capital losses

The Minister for Superannuation and Corporate Law has released the Discussion Paper, ‘Optional Capital Gains Tax Roll-over for Complying Superannuation Funds with Capital Losses’.³ The Federal Government is proposing optional CGT roll-over for capital losses arising from CGT events happening under a merger of a complying superannuation fund with an APRA-regulated superannuation fund with at least five members between 24 December 2008 and 1 July 2010. Comments on the Discussion Paper were due by 13 February 2009.

The purpose of the proposed CGT roll-over is to facilitate further consolidation and rationalisation of the superannuation industry so as to promote greater efficiency. The existing law results in any CGT losses of a transferring superannuation fund being extinguished once the fund assets and members are transferred. In particular, the proposal will eliminate this disadvantage.

The proposal has two main elements:

• capital losses which arise under the existing law will be disregarded when an eligible superannuation fund transfers assets to an eligible receiving superannuation fund upon a merger, and
• the cost base attributes of the transferred assets can be transferred to the receiving fund to maintain the capital loss in the receiving fund.

Update on short selling

ASIC has issued an Advisory, ‘AD09-02 Continuation of exemptions in relation to naked short selling’.⁴ The Advisory, which relates to naked short selling only, confirms that from 8 January 2009 ‘the Corporations Amendment (Short Selling) Act 2008 will remove all but one of the exceptions [from the prohibition on naked short selling] contained in the Corporations Act’. The Corporations Amendment Regulations 2009 (No. 1)⁵ were registered on 6 February 2009. According to the Explanatory Statement⁶, the Regulations ‘repeal regulations 7.9.79 and 7.9.80A of the Corporations Regulations 2001 … in support of Schedule 2 of the Corporations Amendment (Short Selling) Act 2008 (the Amendment Act). Schedule 2 of the Amendment Act contains amendments to prohibit certain short sale transactions, which are generally naked short sales’.

ASIC has announced that ‘it [will] keep the ban on covered short selling of financial securities in place until Friday, 6 March 2009’. According to the media release⁷, ASIC has noted the recent increase in volatility in financial stocks in overseas markets. ASIC will assess the markets carefully over the next few weeks to determine the risks for Australia when the ban is lifted.

In its 21 January 2009 media release, ASIC stated:

ASIC’s intention is and remains to keep its intervention to an absolute minimum. ASIC will continue its consultations with relevant stakeholders and other regulators in Australia and overseas.

ASIC will keep the position under review, and might decide it has sufficient information to be able to lift the ban earlier than 6 March, and will make a decision for 6 March closer to that date.

Superannuation guarantee update

The Tax Office has released the Superannuation Guarantee Ruling⁸, SGR 2009/1: Superannuation guarantee: payments made to sportspersons. The ruling discusses:

• the definition of ‘employee’ and ‘employer’ under section 12(8) of the Superannuation Guarantee (Administration) Act 1992 (Cth) (SGAA) in relation to sportspersons and persons providing services in connection with sporting activities, and
• whether prize monies and other payments made to sportspersons are ‘salary or wages’ under section 11(1)(d) of the SGAA and ‘ordinary time earnings' under section 6(1) of the SGAA.

This ruling was previously released as Draft Superannuation Guarantee Ruling SGR 2008/D1.

The business of being a trustee – the latest on successor fund transfers

Superannuation Industry (Supervision) (SIS) Regulation 6.29 permits a member’s benefit to be transferred from one fund to another without the member’s consent if the transfer is to a ‘successor fund’, provided that the governing rules of the relevant funds permit the transfer and that the requirements for a successor fund are met.

A ‘successor fund’ is defined in SIS Regulation 1.03 as follows:

‘successor fund’, in relation to a transfer of benefits of a member from a fund (called ‘the original fund’), means a fund which satisfies the following conditions:

(a) the fund confers on the member equivalent rights to the rights that the member had under the original fund in respect of the benefits; [and]
(b) before the transfer, the trustee of the fund has agreed with the trustee of the original fund that the fund will confer on the member equivalent rights to the rights that the member had under the original fund in respect of the benefits.

We have identified some significant new issues in conjunction with recent successor fund transfers. They are outlined below.

• With regard to CGT issues, the Discussion Paper, ‘Optional Capital Gains Tax Roll Over for Complying Superannuation Funds with Capital Losses’⁹, is unclear at this stage whether the proposed CGT relief applies to a sale of assets by the transferring fund prior to or in direct connection with a successor fund transfer.
• Time should be left for communicating with members on various matters, such as the following:
  • There are difficulties in relation to deductions for superannuation contributions by eligible persons under now-repealed section 82AAT of the Income Tax Assessment Act 1936 (Cth). This section applied to self-employed or ‘unsupported’ individuals. Note that the substituted provisions in Division 290C of the Income Tax Assessment Act 1997 (Cth) are similar in operation
    
  • ATO Interpretive Decision 2008/35 makes the following statements regarding the operation of section 82AAT:
    • ‘A trustee of a successor fund is not able to accept notice under subsection 82AAT(1C) of the ITAA 1936 to reduce the amount covered by a notice given under subsection 82AAT (1A) of the ITAA 1936 to a predecessor fund in respect of contributions made to that predecessor fund.’
    • ‘The now repealed subsection 82AAT(1A) of the ITAA 1936 required that a notice given under that subsection should be given to the trustee of the fund to which the contribution was made … [N]otice given under subsection 82AAT(1C) … is also subject to the same requirement.’
      

  • Further, ATO private ruling 79344 stated that the trustee of a superannuation fund cannot accept a notice under section 82AAT(1C) from a person who has ceased to be a member of the fund to which contributions were made as a result of a successor fund transfer.
    
    It is expected that these pronouncements would apply equally to the substituted provisions in Division 290C.
    
    Members who have not given the required notice at the time of transfer could lose the ability to claim a deduction. The trustee must consider whether information about this issue should be given to members in advance of the transfer occurring so that any affected member can lodge the required notice.

  • If a superannuation fund allows members to split their superannuation contributions with their spouse, the trustee of the superannuation fund should consider the impact of the proposed transfer on all members who may wish to make application to split their contributions with their spouse. The trustee may need to consider its obligation to make available to members the chance to make an effective election to split contributions before the member’s superannuation entitlement is transferred out of the fund.
    
  • A transferring trustee should also give consideration to what obligations they may have, prior to effecting a successor fund transfer, with regard to members who have not notified the trustee of their tax file number. From 1 July 2007, additional tax of 31.5 per cent is payable by a fund with respect to employer and salary sacrifice superannuation contributions for members who have not provided a valid TFN. ATO ID 2008/161 ‘Superannuation entities: tax offset – no-TFN contributions income – successor fund’ states that where ‘the member quotes their TFN to the successor fund the trustee of that fund is not entitled to a tax offset…for tax payable by the original fund on no-TFN contributions income’.
    
• During these times of financial uncertainty, it is imperative that any trustee consider asset valuation particularly carefully.
  
  Asset valuations may need to be done more regularly and unlisted and illiquid assets will require specialist advice. When establishing the SFT timetable, sufficient time should be allowed for these processes to be completed.
  
• If a superannuation fund has made piecemeal amendments to its trust deed in the past and does not have an official consolidated trust deed, sufficient time must be allocated to allow proper consolidation of the trust deed as most receiving trustees will insist that it be prepared.
  
  The process of consolidating superannuation fund trust deeds often identifies errors made in previous piecemeal amendments which need to be addressed as part of the consolidation process. Sometimes APRA must be approached regarding rectification of a previous amendment error which takes time and may slow down the process of a successor fund transfer.
  
• If the successor fund transfer involves a change in a fund’s insurance policy for group insurance, this may mean that the ‘equivalency’ requirement for a successor fund transfer can not be achieved without amendment of the new insurance policy.
  
  IFSA Guidance Note No. 11.00 ‘Group Insurance Takeover Terms’¹⁰ (issued in September 2000) provides some guidance when dealing with a change in a group life insurer. However, this Guidance Note only goes so far. Issues arising from differences in coverage and the terms of cover may result from a change in insurance policy and a detailed and time-consuming analysis may be required in these circumstances to determine whether the successor fund transfer can be achieved.

Freehills update

• Natalie Gullifer was quoted in the Australian Financial Review article ‘Not So Super for Employers’ on 30 January 2009 in relation to Draft Superannuation Guarantee Ruling SGR 2008/D2¹¹ saying that the Draft Ruling will require employers to perform an ‘employee-by-employee analysis’ to calculate SG contributions:

  In the past, if an award specified what their ordinary hours were, the view was that SG only had to be paid on those ordinary hours but now the Tax Office is saying you have to look at the regular work pattern for an employee … Sometimes you don’t know the regular work pattern for an employee until after the event, and yet super had to be paid regularly, at least every quarter … Nothing about the OTE definition has changed … so what legal basis does the ATO have for changing its view?

• On 5 February 2009, Peggy Haines was on a panel at the Fund Executive Association Forum in Sydney, discussing ‘Putting fund members first’.
• Peggy Haines spoke in Melbourne at the Centre for Investor Education ‘Chairs Forum’ on 15 February 2009 and at the Centre’s ‘CEO Summit’ on 20 February 2009, discussing ‘best interests’ in the context of risk and new products.

Endnotes

1. Tax Laws Amendment (2008 Measures No 6) Bill 2008
2. Tax Laws Amendment (Taxation of Financial Arrangements) Bill 2008
3. Discussion Paper: ‘Optional Capital Gains Tax Roll-over for Complying Superannuation Funds with Capital Losses’
4. AD09-02 Continuation of exemptions in relation to naked short selling
5. Corporations Amendment Regulations 2009 (No. 1)
6. Explanatory Statement
7. Media Release: ASIC extends ban on covered short selling of financial securities
8. SGR 2009/1: Superannuation guarantee: payments made to sportspersons
9. Discussion Paper: ‘Optional Capital Gains Tax Roll-over for Complying Superannuation Funds with Capital Losses’
10. IFSA Guidance Note No. 11.00
11. Superannuation Update December 2008

More information

For information regarding possible implications for your business, contact the Superannuation Partners.