Superannuation Update June 2009

General update

Federal Budget review

The main superannuation announcements made in the Federal Budget 2009–10 were as follows:

• With effect from 1 July 2009, the concessional contribution cap will be reduced from $50,000 to $25,000 per annum indexed. The transitional concessional contributions cap (applicable to persons aged 50 and over) will be reduced from $100,000 to $50,000 per annum with the cap fading out as originally proposed in the 2011–12 year.
• The rate of government co-contributions will be temporarily reduced to $1 per $1 of contributions, returning to the present rate of $1.50 in the 2014–15 year.
• The government has proposed that the pensions draw down relief announced in February 2009 for the 2008–09 year will be extended to the 2009–10 year.
• The optional capital gains tax roll-over for capital losses for mergers of complying superannuation funds with APRA-regulated superannuation funds with at least five members will be expanded.
• The government has released the Australia’s Future Tax System report into retirement incomes and acknowledged its findings, including that the preservation age should be gradually increased to 67. However, on 29 May 2009, the Prime Minister stated that there were no current plans to increase the preservation age at this stage.

The Tax Laws Amendment (2009 Budget Measures No. 1) Bill 2009 seeks to legislate the first two changes above. It was passed by the House of Representatives on 1 June 2009 and has been referred to the Senate Economics Committee for report by 22 June 2009.

The above information is drawn from the Greenwoods & Freehills 12 May 2009 Tax Brief Federal Budget 2009–10.¹

Excessive termination payments

The Minister for Superannuation & Corporate Law has released the exposure draft Corporations Amendment (Improving Accountability on Termination Payments) Bill 2009² (see also the Explanatory Memorandum³) and accompanying draft Regulations.⁴

According to the media release,⁵ the Bill is ‘aimed at curbing excessive termination payments’ and will:

• significantly lower the ‘threshold at which shareholder approval is required for a termination payment from seven times an annual remuneration package to one times average annual base pay’
• expand the number of company officers for which approval is required to include key management personnel and the five most highly paid officers of the entity, and
• broaden the definition of what constitutes a ‘benefit’.

With respect to superannuation, the Explanatory Memorandum notes:

‘The draft regulations prescribe, for the avoidance of doubt, that a benefit includes any kind of pension, [and] the payment of superannuation in excess of the statutory amount… The draft regulations also prescribe, for the avoidance of doubt, that a benefit does not include … payments from a defined benefits superannuation scheme that was in existence before the regulations commenced.’

The Bill will not alter ‘contractual arrangements entered into before the Bill becoming law’.

Submissions were due by 2 June 2009.

Unfair contract terms

The then-Assistant Treasurer and Minister for Competition Policy and Consumer Affairs, The Hon Chris Bowen MP, released⁶ a consultation paper ‘The Australian Consumer Law: Consultation on draft provisions on unfair contract terms’⁷ on 11 May 2009.

The paper includes an exposure draft of unfair contract terms which would be added to the Trade Practices Act 1974 (Cth) and the Australian Securities and Investments Commission Act 2001 (Cth) in relation to the supply of financial services. Further, the draft legislation also allows for regulations to prohibit terms in ‘standard form’ contracts. The draft legislation aims to give effect to COAG’s agreement to ‘implement a national unfair contract terms law’.

Submissions were due on the consultation paper by 22 May 2009.

The unfair terms are proposed to apply to both consumer and business-to-business ‘standard form’ contracts.

A ‘standard form’ contract is not defined under the draft legislation, specifically to avoid the risk of avoidance. However, a court can take into account whether one party has all or most of the bargaining power and whether a party was more or less required to accept or reject terms of a contract in the form in which they were presented, amongst other things.

An unfair term in a standard form contract is void and severable. A term in a standard form contract will be unfair if:

• it would cause a significant imbalance in the parties’ rights and obligations arising under the contract, and
• the term is not reasonably necessary to protect the legitimate interests of the party who would be advantaged by the supply.

There is a proposed rebuttable presumption that a term is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term, unless the party can prove otherwise.

The draft legislation is due to commence from 1 January 2010 but will only apply to existing contracts to the extent that they are renewed or varied after the commencement date.

Clearly, the proposed new legislative regime has potentially far-reaching implications. However, although the legislation is intended to apply in the financial services industry, it difficult to predict what effect, if any, it will have on superannuation fund trustees.

ING Funds Management Ltd v ANZ Nominees Ltd; ING Funds Management Ltd v Professional Associations Superannuation Ltd [2009] NSWSC 243

This case involved two ING managed investment schemes and an attempt by the responsible entity INGFM to amend the constitution of each scheme to suspend members’ rights of redemption given market volatility. The objective was to freeze redemptions for a time sufficient enough to allow a meeting of members to be held to consider a resolution to modify the constitution, so as to impose a further embargo on redemptions. INGFM’s concern was that, given redemption requests already received and those still anticipated and in the context of a ‘tight’ market, it expected it would be difficult to realise assets except on heavily discounted terms which would expose the schemes to instability.

The proceedings were commenced on 3 February 2009. In its capacity as responsible entity, INGFM sought declaratory relief as to the validity of November 2008 amendments to the constitution of each scheme.

Were the documents deeds?

Both schemes were established by deeds and the constitutions for each scheme allowed modification by supplemental deed.

Two documents were executed in November 2008, one for each managed investment scheme. Each document was described as a supplemental deed, the only party to which was INGFM as responsible entity. Each document purported to modify the constitution of the relevant scheme by inserting a new clause to make any new redemption request inoperative until the end of a suspension period. INGFM accepted that each November 2008 document was not in truth a deed as the signatories, being INGFM’s general counsel and secretary, were not persons whose signatures were together capable of causing the document to be a deed.

A further document was, in each case, created in December 2008. Each such document was again described as a supplemental deed and was in the form of a deed with INGFM alone as its party. The clauses of these documents were of exactly the same effect as the November documents. Each of the December documents was signed by a director and a secretary and the parties accepted that each of the December documents took effect as a deed executed by INGFM.

On 8 January 2009, two further documents were signed in an attempt to repair any defect in the November documents. Each document was expressed to be a deed. In each case, the deed recited the steps taken in November 2008 and a subsequent resolution of the board of directors of INGFM ‘adopting and ratifying the acts of’ the signatories to the November document. The court found that these deeds were validly executed.

Were the amendments in accordance with section 601GC(1)(b) which allows the constitution of a registered scheme to be amended by the responsible entity ‘if the responsible entity reasonably considers the change will not adversely affect members’ rights’?

Justice Barrett held that it was only open to INGFM to amend the constitution by deed; consequently the November 2008 documents were ineffective.

With regard to whether the requirements of section 601GC(1)(b) were satisfied, Justice Barrett detailed the following elements necessary to an examination of the section 601GC(1)(b) requirements:

• the company’s state of mind regarding ‘members’ rights’
• the meaning of ‘member rights’ in contrast to ‘interests’, ’enjoyment’ of rights and the ‘value’ of rights
• the meaning of ‘adversely affect’; that is, will the amendment remove or impair existing rights in a disadvantageous manner, and
• whether the belief that members’ rights are not adversely affected is reasonable in the circumstances.

Justice Barrett had limited evidence on which to assess the above elements and found that, while the December and January documents could be accepted as deeds, there was no evidence of INGFM giving reasonable consideration to the adverse impact of the modification on members’ rights. His Honour held this to be so, notwithstanding all of the following decision-making processes:

• the minutes indicated that there was discussion at the board meeting regarding INGFM’s duties and obligations and options available to protect unit holders
• INGFM’s in-house legal counsel provided legal advice at the board meeting regarding INGFM’s powers under the constitution and the law
• a management team (being delegates of the board) met after the board meeting and considered a paper prepared by INGFM’s Director Strategic Programs and an accompanying legal advice from an external law firm which drew attention to INGFM’s duties under section 601GC(1)(b)
• the management team discussed INGFM’s duties as RE and ‘in particular the obligation to act in members’ best interests and to ensure that it did not unilaterally amend the Constitution in a way that was adverse to the rights of members’, and
• management formally resolved that the amendment would not adversely affect members’ rights.

So despite all of these matters of process which appeared quite comprehensive, Justice Barrett ultimately found that there was no evidence of the actual basis on which the officers made their decision nor evidence about the thinking that led the officers to the ‘baldly stated conclusion’ that the modification they sought to implement would ‘not adversely affect members’ rights’.

Instead, Justice Barrett found that INGFM was preoccupied with preserving value for members (being of necessity the members who chose to remain in the schemes, not those who had already sought redemption), and that the management paper made only scant reference to members’ rights and instead focused on the question of members’ interests and the need to protect them.

Further, Justice Barrett found that even had INGFM turned its mind to the issue properly, there was no reasonable basis available to support the conclusion that the modification would not adversely affect members’ rights as the right being affected was the right to be paid money within a specified period in return for surrender of units. In other words, the purpose of the modification was in fact to delay giving effect to redemption requests, requiring members to wait longer for their money. His Honour found that the deferral in the availability of money cannot but be seen as adverse from the viewpoint of members, particularly to a person wishing to have money.

In summary, the concern about the schemes’ ability to realise assets advantageously was irrelevant to an assessment of members’ rights. The right of redemption is a member right and ‘the concern with declining asset values went merely to the value or enjoyment of the right’.

Consequently, the December 2008 and January 2009 documents, although deeds, were held to be invalid under section 601GC(1)(b).

The decision serves as an important reminder that a deed can generally only be amended by another deed, and that limitations on a power of amendment by reference to a consideration of members’ rights needs to be properly understood and taken into account.

Duty of director to provide documents to the company

In the recent judgment Motor Trades Association of Australia Superannuation Fund Pty Ltd v Rickus (No 3) [2008] FCA 1986, the Federal Court considered a director’s obligation to produce documents to the company upon request. The context to the dispute between the trustee company and the director was that the director had received a notice from APRA to produce certain documents as part of an investigation by APRA and he had complied with this notice. The documents included personal notes and correspondence.

After unsuccessful attempts to obtain the documents from the director, the trustee commenced legal proceedings against the director to require him to produce the same documents to the trustee.

The Federal Court decided that the director of the trustee company in this case:

• had a duty to provide to the company copies of documents which the company requested in order to allow the company to respond to APRA’s investigation, and
• this obligation arose because of a duty to act in the best interests of the company.

ASIC’s updated Regulatory Guide 175

ASIC has released⁸ an updated Regulatory Guide 175 Licensing: Financial product advisers—Conduct and disclosure,⁹ which is ‘a consolidation of guidance previously provided by ASIC, including guidance through ASIC’s frequently asked questions about financial services and media advisories. The update incorporates changes in the law since the regulatory guide was last updated on 28 May 2007’.

APRA’s draft Prudential Practice Guide on reserves

APRA has released the Discussion Paper¹⁰ Use of reserves in superannuation funds, and the Draft Prudential Practice Guide,¹¹ SPG 235 – Use of reserves in superannuation funds.

According to the media release,¹² the Draft Guide ‘provides practical guidance on measures APRA would regard as good practice for a trustee and its directors to take in respect of management of fund reserves. It provides examples of specific types of reserves and outlines measures for inclusion in a reserving strategy’. The Draft Guide also ‘distinguishes between amounts set aside for contingent events and provisions for accrued expenses such as administration or taxation. It also focuses on measures a trustee might consider in formulating a comprehensive reserving strategy’. Comments were due by 5 June 2009.

Payroll tax on superannuation contributions

The Victorian State Revenue Office has issued a Payroll Tax Superannuation Contributions Circular¹³ which discusses which superannuation contributions attract payroll tax under the Payroll Tax Act 2007 (Cth).

Update on short selling

ASIC has lifted¹⁴ the ban on covered short selling of financial securities from 10.00am on Monday 25 May 2009. ASIC will continue to monitor the market conditions and will not ‘hesitate to reimpose the ban immediately’ if ASIC sees fit.

The business of being a trustee – New ATO Ruling on ‘ordinary time earnings’ released

The much-anticipated final Superannuation Guarantee Ruling on ‘ordinary time earnings’ (SGR 2009/2) was issued on 13 May 2009 and will commence on 1 July 2009.

Trustees will need to be aware of these developments in superannuation guarantee in order to continue to act on behalf of their fund members in receiving superannuation guarantee contributions. These changes may affect the minimum benefit which is payable under existing deed provisions and may even necessitate a deed amendment of the salary definition for benefit purposes.

From 1 July 2008, ordinary time earnings (OTE) is the only earnings base that can be used for the purposes of calculating the requisite employer superannuation contributions under the Superannuation Guarantee (Administration) Act 1992 (Cth) (SG Act). SGR 2009/2 replaces the ATO’s Superannuation Guarantee Ruling 94/4 (SGR 94/4) which outlined the ATO’s previous interpretation of the term OTE under the SG Act. SGR 2009/2 outlines the ATO’s revised interpretation. SGR 2009/2 also replaces SGR 94/5 which dealt with the interpretation of ‘salary and wages’. ‘Salary and wages’ is the basis on which an employer’s ‘shortfall’ is assessed under the SG Act. An employer has a ‘shortfall’ under the SG Act where it has failed to comply with its minimum statutory superannuation obligations.

The ATO released Draft Superannuation Guarantee Ruling SGR 2008/D2 (Draft Ruling) on 5 November 2008 for industry comment. The Draft Ruling detailed the ATO’s proposed new interpretation of OTE which departed in several significant ways from existing SGR 94/4, most notably by including ‘regular overtime’ in OTE.

SGR 2009/2 differs from the Draft Ruling in the following key respects:

The treatment of overtime

The ATO has generally reverted to its position under SGR 94/4 by excluding overtime from OTE and discarding the notion of ‘regular overtime’. SGR 2009/2 states that an employee’s ‘ordinary hours of work’ are the hours specified as his or her ordinary hours of work under the relevant award or agreement (or combination of those instruments) that governs the employee’s conditions of employment.

This position expressly takes account of the approach taken by the High Court in Australian Communication Exchange Ltd v Deputy Commissioner of Taxation [2003] HCA 55 which deferred to the importance of industrial instruments like awards in interpreting terms such as ‘ordinary hours of work’ for purposes of superannuation. The ATO noted that although none of the cases in this area is ‘quite decisive of the issue for [SG Act] purposes’, it conceded that Parliament consciously chose the expression ‘ordinary hours of work’ in framing the SG Act in 1992 ‘knowing that it had a specialised and well-established meaning in the particular context of the Australian industrial relations system, and intended that the interpretation of the expression be informed by that context’.

If ordinary hours of work are not specified in a relevant award or agreement, SGR 2009/2 states that the employee’s ordinary hours of work would be the ‘normal, regular or customary hours worked by the employee, as determined in all the circumstances of the case’. If, however, it is not possible or practicable to make such a determination, then ‘the actual hours worked should be taken to be the employee’s ordinary hours of work’.

The treatment of bonuses

Certain types of bonuses have always been considered to be included in OTE, particularly performance related bonuses. However, under SGR 2009/2 it seems that the types of bonuses included in OTE have been expanded to include Christmas bonuses. Christmas bonuses were excluded from OTE under SGR 94/4 and the Draft Ruling.

There is also some further guidance now under SGR 2009/2 confirming that bonuses which are labelled as ‘ex-gratia’ but are actually in respect of ordinary hours of work are included in OTE.

The treatment of payments in lieu of notice

The position under SGR 94/4 was that payments in lieu of notice were excluded from OTE. OTE is defined in the SG Act, relevantly, as ‘…earnings in respect of ordinary hours of work…’. Accordingly, payments in lieu of notice were previously excluded from OTE because they were considered payments ‘for hours never worked’. The reasoning provided in the Draft Ruling implied that this position was to be reversed because payments in lieu of notice could be categorised as payments made to satisfy entitlements that accrue by reason of the employee’s ordinary service. Consistent with that approach, SGR 2009/2 now expressly provides that such payments are included in OTE (although it is interesting to note that redundancy payments remain excluded from OTE).

The treatment of certain types of paid leave, including parental leave

The position under SGR 94/4 was that paid parental leave was excluded from OTE. That position was changed under the Draft Ruling, which expressly provided that parental leave payments were to be included in OTE. However, SGR 2009/2 provides that as a result of the Federal Government’s announcement on 12 May 2009 that it ‘intends to clarify the superannuation guarantee status of certain kinds of leave payments’, SGR 2009/2 does not deal with parental leave payments.

For the same reason, SGR 2009/2 provides that it does not deal with payments made to employees who are on other ‘ancillary’ kinds of leave, including top-up payments made while an employee is serving on jury duty or with the defence reserve forces. Under SGR 94/4, such top-up payments were specifically excluded from OTE.

The treatment of benefits under employee share schemes

SGR 94/4 and the Draft Ruling were both silent on the treatment of the acquisition of a share or right to acquire a share under an employee share scheme. Now, SGR 2009/2 expressly provides that such benefits are not included in OTE.

Some words of warning to employers

There are still several types of payments to employees which will be included in OTE from 1 July 2009 which were previously thought to be excluded from OTE.

Employers will need to review their existing employment arrangements to determine whether any additional superannuation contributions will be required to be made from 1 July 2009.

If so, employers will need to ensure their payroll systems will be equipped to accommodate the changes from 1 July 2009. They will also need to ensure that any relevant terms in employment agreements are appropriately considered and changed, if required.

Interestingly, while SGR 2009/2 states that it applies from 1 July 2009, as there has been no change in the SG Act affecting the definition of OTE, the inference is that these items should always have been included in OTE. Consequently, it is open to the ATO to maintain that this revised interpretation has retrospective application.

In relation to parental and ‘ancillary’ leave, given the express acknowledgement that these leave payments are not dealt with in SGR 2009/2, it seems that these payments can continue to be excluded from OTE following the approach under SGR 94/4. However, employers should be ready to act if this position changes once the government’s pending clarification comes through.

A final word of caution to all

As a final word of caution, SGR 2009/2 is over 40 pages long and contains a number of examples, so its detail needs to be considered before definitive legal conclusions can be reached on any particular situation.

Freehills update

• Michael Vrisakis wrote an article on ‘Introducing unit pricing materiality thresholds into a trust’s governing rules’ in the Financial Services Newsletter April 2009 and on ‘Instalment warrant bubble’ in the June 2009 issue.
• Freehills has made a submission on the unfair contract terms provisions to the Minister for Competition Policy and Consumer Affairs.
• Natalie Gullifer’s article ‘Risk areas for superannuation trustees brought to light’ has been published by the UK Linex Legal.
• Peggy Haines spoke at the Centre for Investor Education Deputy Chairs and committee Chairs Council on 15 May 2009.

Endnotes

1. Greenwoods & Freehills 12 May 2009 Tax Brief Federal Budget 2009–10
2. Exposure draft, Corporations Amendment (Improving Accountability on Termination Payments) Bill 2009
3. Explanatory Memorandum, Corporations Amendment (Improving Accountability on Termination Payments) Bill 2009
4. Draft Corporations Amendment Regulations 2009 
5. Media release, ‘Government Releases Termination Benefits Reform Bill’ 
6. Media release, ‘Consultation on National Unfair Contract Terms Provision’ 
7. Consultation paper ‘The Australian Consumer Law: Consultation on draft provisions on unfair contract terms’ 
8. Media release, ‘AD09-92 ASIC consolidates guidance on conduct and disclosure obligations for financial advisers’
9. Regulatory Guide 175 Licensing: Financial product advisers—Conduct and disclosure 
10. Discussion Paper, Use of reserves in superannuation funds 
11. Draft Prudential Practice Guide, SPG 235 – Use of reserves in superannuation funds
12. Media release, ‘APRA consults on the use of reserves in superannuation funds’ 
13. Payroll Tax Superannuation Contributions Circular 
14. Media release, ‘09-94 ASIC lifts ban on covered short selling of financial securities’

More information

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