Superannuation Update August 2009

General update

Federal Parliament update

Federal Parliament was busy in the lead up to its winter break. Here is a brief summary of the progress of superannuation-related Bills.

• The Tax Laws Amendment (2009 Budget Measures No. 1) Act 2009 (Cth)¹ received Royal Assent on 29 June 2009 after passing all stages of Parliament without amendment. Schedule 2 of the new Act ‘temporarily reduce[s] the matching rate and maximum co-contribution that is payable on an individual’s eligible personal superannuation contributions’. Schedule 3 ‘reduce[s] the concessional contributions cap to A$25,000 per annum (indexed) from the 2009–10 financial year. The reduced cap [applies] to all concessional superannuation contributions made in the 2009–10 and later financial years’. Schedule 3 reduces the transitional concessional contributions cap.
• The Corporations Amendment (Improving Accountability on Termination Payments) Bill 2009² was introduced into Parliament on 24 June 2009 and has now been referred to the Senate Economics Legislation Committee for report by 7 August 2009. The exposure draft of this legislation was summarised in our Superannuation Update June 2009 and the policy, objectives and key principles underpinning the legislative changes remain the same under the Bill. The new Bill ‘introduces a significantly lower threshold at which termination benefits must be approved by shareholders. Under the new arrangements, termination benefits for company directors and executives exceeding one year’s average base salary are subject to shareholder approval’. Pending the release of related Regulations, the exact scope of the legislative regime remains uncertain in several respects, such as the specific benefits that will be included and excluded from the new cap including the extent to which superannuation contributions and defined benefits are carved out.
• The Tax Laws Amendment (2009 Measures No. 2) Act 2009 (Cth)³ received Royal Assent on 23 June 2009 after passing all stages of Parliament without amendment. Schedule 1 of the Act ‘amends various Acts to ensure there are no adverse taxation implications arising from a payment made by [APRA], or by a liquidator, under the financial claims scheme’.
• The Superannuation Guarantee (Administration) Amendment Regulations 2009 (No 1)⁴ were registered on 25 June 2009. The Regulations amend the Superannuation Guarantee (Administration) Regulations 1993 to ensure that employers do not have to make superannuation guarantee payments on paid parental leave, payments for service with the Defence Force Reserves and payments for ‘eligible community service activity’ which includes jury service as announced in the 2009–10 Federal Budget. The Regulations commenced on 1 July 2009.
• On 18 June 2009, the Australian Government Actuary registered the Family Law (Superannuation) (Interest Rate for Adjustment Period) Determination 2009.⁵ The determination relates to the interest rate for ‘adjustment of entitlements of divorced or separated spouses under certain orders or agreements splitting particular kinds of future superannuation benefits made in property settlements under the Family Law Act 1975 (Cth)’.
• The Superannuation Industry (Supervision) Amendment Regulations 2009 (No. 4)⁶ were registered on 5 June 2009. The Regulations ‘give effect to the Government’s 2009–10 Budget measure to reduce the minimum payment amounts for account-based pensions for the 2009–10 financial year. This measure extends the pension drawdown relief provided in March 2009 for the 2008–09 financial year’. The Regulations also make ‘minor technical changes to clarify the intended operation of the payment rules for account-based pensions’.
• On 31 July 2009, Treasury released an Exposure Draft⁷ of the Tax Laws Amendment (2009 Measures No. 6) Bill 2009 on the previously announced optional capital gains tax roll-over for capital losses arising from a complying superannuation fund’s merger with an APRA regulated superannuation fund with at least five members. The closing date for submissions on the exposure draft of the Bill is 28 August 2009.

APRA update

APRA has released the latest edition of its Insight publication (Issue 2, 2009).⁸

In providing its overview of the superannuation industry, APRA noted the following:

• Sixty-one corporate funds were wound up during the year. APRA expects this trend to continue given the optional capital gains tax rollover relief for capital gains losses resulting from a complying superannuation fund’s merger (which was first announced in December 2008).
• A number of trustees had applied for and been granted relief by APRA from portability requirements under regulation 6.37 of the SIS regulations. APRA believes that it is appropriate to continue to manage this issue on a case-by-case basis.
• Valuation of unlisted assets remains ‘contentious’. APRA has been providing guidance on this issue and is continuing to monitor trustee compliance.⁹
• APRA’s recent review of defined benefit funds revealed that 15.9 per cent of defined benefit funds and 19.7 per cent of defined benefit/hybrid sub-funds were in an unsatisfactory financial position as at 30 June 2008. APRA continues to focus on this issue and states that it is ‘gratifying to note that these matters are receiving close attention from the industry and the professions’.
• APRA commenced a review of administrators in 2008 and a review of custodians in 2009.
• APRA reports an 83 per cent fall in the number of breach reports lodged with APRA, following the introduction of the ‘significance’ test.
• APRA has used the information obtained in its recent liquidity questionnaire to enhance its supervision of the superannuation industry.

This edition also contains an editorial which provides ‘an overview of the superannuation industry from 2007 to the end of 2008 in the context of the global financial crisis and negative returns for the industry’.

AUSTRAC update

AUSTRAC has signalled the end of the grace period under the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Cth) with its first enforcement action under the Act leading to AUSTRAC accepting enforceable undertakings from Barclays Bank and Mega International Commercial Bank Co in relation to their obligations under the Act.

Further, AUSTRAC has released the Report¹⁰, AUSTRAC Typologies and Case Studies Report 2009. According to the media release¹¹, the Report outlines the ‘latest money laundering methods and details of other financial crimes’, and provides case studies which ‘illustrate the practical importance of businesses complying with their obligations under Australia's [AML/CTF] legislation’. In particular, the Report discusses early release superannuation schemes (Case Study 34 and Case Study 42) and provides an example of theft of A$1.5 million from superannuation funds (Case Study 30).

ATO update

(a) Contributions cap

On 12 May 2009, the Australian Taxation Office (ATO) sent letters to individuals who may have exceeded their superannuation contributions cap for 2007–08. Since that time, the ATO has identified errors in its systems and further areas where errors in fund and member reporting data have led to some members’ concessional and non-concessional contributions being incorrectly calculated. Funds have been asked to re-report where they are aware of any errors and the ATO is correcting its system errors. Taxpayers may receive further communication from the ATO regarding these errors.

(b) Superannuation guarantee

The Tax Office has released an Addendum to Superannuation Guarantee Ruling 2009/2¹², SGR 2009/2A1—Addendum: Superannuation guarantee: meaning of the terms 'ordinary time earnings' and 'salary or wages'. The Addendum amends Superannuation Guarantee Ruling SGR 2009/2 to reflect the recent amendment of the Superannuation Guarantee (Administration) Regulations 1993 which ensures that employers do not have to make superannuation guarantee payments on paid parental leave and certain ancillary leave payments (as discussed above in the Federal Parliament update). The Federal Government announced this measure in the 2009–10 Budget. The Addendum applies from 1 July 2009.

The Addendum states that it also ‘clarifies the status of workers' compensation payments in cases where employment is not terminated but the employee does not attend work due to his or her injuries. This Addendum does not represent a change to the Commissioner's view on these payments’.

The Ruling now contains (with effect from 1 July 2009, according to paragraph 12 of the Addendum) the following paragraph 68:

‘Any workers’ compensation payments received by an injured employee for the hours the employee performs work or attends work as required form part of ‘salary or wages’. In contrast, if the employment has been terminated, or if the employee is paid workers’ compensation for hours not worked (or not attending work as required); the payment would not be ‘salary or wages’ as in these situations it cannot be said that the payment is a reward for the services of the employee to the employer.’ [Emphasis added.]

We consider that the position is still clear where worker’s compensation is being paid to an employee who is not working at all. However we consider that the insertion of the reference to the hours worked by an employee or the hours the employee attends work leads to some uncertainty where the employee is returning to work.

ASIC update

(a) ASIC Class Order 09/210 Intra-fund superannuation advice and Regulatory Guide 200 Advice to superannuation fund members

On 7 July 2009, ASIC released Class Order 09/210 which provides relief from Corporations Act 2001 (Cth) (Corporations Act) section 945A to trustees of superannuation funds in certain circumstances. Also, on 9 July 2009, ASIC released¹³ a new Regulatory Guide 200 Advice to super fund members¹⁴ which aims to ‘clarify existing law and increase super fund members’ access to advice about their existing interest in a super fund’. Below we provide a brief summary of these new developments.

Giving personal advice

A superannuation fund trustee with an AFS licence which authorises the provision of personal advice can give personal advice to a superannuation fund member about (among other things) the member’s existing interest in the fund. A Statement of Advice must generally be provided. In giving personal advice about the member’s existing interest in the superannuation fund, a superannuation fund trustee must either:

1. comply with the requirement to give ‘suitable’ advice. The requirement to give suitable advice is ‘scalable’; the level of inquiry and analysis required to ensure that advice is suitable can reflect the complexity of the advice being provided. (See existing section 945A of the Corporations Act regarding the requirement to obtain information about a client’s personal circumstances before giving advice and Regulatory Guide 175 Licensing: Financial product advisers—Conduct and disclosure)¹⁵, or
2. rely on Class Order 09/210 Intra-fund superannuation advice¹⁶ if eligible. This new Class Order provides relief from section 945A to the trustee of a superannuation fund (other than SMSFs) and their authorised representatives for the provision of personal advice to a member of that fund where:
   • the trustee holds an AFS licence which authorises the provision of personal advice in relation to superannuation
   • the advice relates only to the member’s existing interest in the superannuation fund
   • the advice does not relate to:
     • an investment strategy which involves an underlying financial product requiring disclosure under section 1012IA
     • an election by the member to receive a pension from their interest in the growth phase, or
     • the deemed issue of a new interest in the fund arising from a change from one sub-plan to another within the fund where the member has a choice or election in relation to the change.

In order to qualify for the relief, the adviser must inform the member of the following:

• the advice is limited to the member’s interest in the fund (this advice must be provided before or at the same time as the advice is provided)
• the advice is limited to the member’s interest in the fund in reliance on Class Order 09/210 (this advice must be provided in writing when or as soon as practicable after the advice is provided), and
• any increase in fees, costs, charges, insurance premiums or any remuneration or commission paid in relation to the member’s interest or insurance (this advice must be provided in writing when or as soon as practicable after the advice is provided).

Giving general advice and factual information

A superannuation fund trustee with an AFS licence which authorises the provision of general advice can give general advice to a member of the superannuation fund provided that the trustee gives the required warning¹⁷ to the member. General advice can be provided even where the provider of the advice holds information about the personal circumstances of the member. A simpler warning may be provided when providing oral advice. See Class Order 05/1195 Simplified warning for oral general advice.¹⁸ There is a licensing exemption for product issuers, including superannuation fund trustees, giving general advice about the products they issue.

A trustee of a superannuation fund does not need an AFS licence in order to give factual information to members of the fund. See Regulatory Guide 36 Licensing: Financial product advice and dealing.¹⁹

Different ways of delivering factual information and advice

ASIC allows superannuation fund trustees to determine how to provide factual information and advice, stating that the ‘Corporations Act is neutral about technology’.

Appendix

The Appendix to the Regulatory Guide provides examples of the provision of factual information and financial product advice to members. The examples include practical tips on call centre conversations, Statements of Advice, emails and personal advice.

(b) Temporary residents

ASIC registered the Class Order²⁰, [CO 09/437]: Departed former temporary residents superannuation—Disclosure relief, on 10 June 2009. According to the Explanatory Statement, the Class Order provides ‘fund trustees with relief from the requirement to notify and give exit statements to departed former temporary residents in the circumstances of the Unclaimed Moneys Act on conditions that reduce the potential for adverse impact on those persons ultimately being reunited with their benefits’.

The class order provides that a trustee of a regulated superannuation fund that pays an amount to the Commissioner of Taxation under the Superannuation (Unclaimed Money and Lost Members) Act 1999 (Cth) does not have to notify the member in relation to the payment of unclaimed moneys under section 1017B of the Corporations Act or provide the member with an exit statement under section 1017D of the Corporations Act so long as any Product Disclosure Statement, Supplementary Product Disclosure Statement or other relevant documentation prepared after the commencement of the Class Order includes the following:

• a statement that the trustee relies on the relief under Class Order 09/437, and
• the prescribed information about unclaimed moneys.

The above information must also be prominently disclosed on the trustee’s website. If so requested, the information must also be provided directly to the member (along with other documentation reasonably requested) as soon as possible after the request and, in any event, within one month.

The relief is said to respond to ‘industry concerns that a fund trustee will generally not be aware which of its members have been temporary residents until advised by the [Tax Office] and will generally not have overseas addresses for a temporary resident member’.

In one sense, the answer to this question is simple. No. And yet, Australian courts have grappled with the issue over several decades.

These courts have generally leaned towards the negation of a duty of a superannuation trustee to exercise natural justice in its decision-making. But at the same time this conclusion has clearly sat uncomfortably with key judges.

To choose an arbitrary starting point, in the case of Pope v Lawler ²¹, Justice Nicholson pointed out: ‘… the decision-making process of Trustees should not have applied to them the rules deriving from administrative law’, citing Karger v Paul ²². The judgment of Justice Byrne in Flegeltaub v Telstra Super Pty Ltd ²³ (‘Flegeltaub’) was more emphatic: ‘It is clear that the trustee is not bound by the rules of natural justice …’.

What Justice Byrne then said is of particular significance, ‘but the circumstances of the case may demand, as a matter of fairness, that, on a particular matter, the position of the applicant be sought so that a proper decision can be made on that matter’.

This is the first aspect to note in relation to a decision of a trustee’s duty in this area, namely that a trustee may have a positive obligation to ascertain information in particular circumstances.

That positive obligation may stem from the existence of what Justice Byrne called ‘an apparently adverse matter of fact’ which he went on to say ‘is peculiarly within the knowledge of the applicant or for which the applicant may reasonably be expected to have an explanation’.

Such a positive duty could also extend to more mundane facts where the duty to ascertain information derives not so much from any adverse matter of fact but rather from the nature and dimensions of the trustee’s duty itself.

One example of this situation cited by Justice Campbell in his paper ‘Exercise by Superannuation Trustees of Discretionary Powers’²⁴ is the determination of a death benefit payment:

‘In the case of a superannuation fund, the trustee will frequently not know the sort of information that is needed to decide, for instance, who are the dependants of a member at the date of his death, or what are the facts that might warrant the payment of a death benefit to one or other of them. If the trust documentation calls for the trustee to form an opinion about who are the dependants of the member, or to decide who (if anyone) among his dependants ought to receive a death benefit, proper performance of the trustee’s duty to act bona fide and ‘upon genuine consideration’ may well require the trustee to find these matters out. Frequently that will involve asking the various people who might be candidates for receiving the benefit what their claims are, and, if the facts alleged by the various claimants do not match up, taking steps to decide whose version of the facts is correct. This exercise need not necessarily be done in an exhaustive fashion, but it would need to be done to the extent that was needed for the decision of the trustee to be a bona fide one, made upon a genuine consideration of the correct question.’

His Honour then makes the observation:

‘While carrying through that procedure is certainly not identical to according a claimant the same rights of natural justice as an administrative decision-maker would be obliged to accord to someone whose interests might be affected by an administrative decision, it covers at least some of the ground.’

Another manifestation of this positive duty is the duty of a superannuation trustee to disclose adverse material to a particular claimant. As was observed by Justice Byrne in the Flegeltaub decision: ‘It may involve a disclosure to the applicant or to her representative of the adverse material…’.

This process was described by Justice Callaway on appeal in the Flegeltaub case in the following terms:

‘... One cannot ordinarily decide a question of fact in good faith and give it real and genuine consideration without conducting some investigation and in some cases that will entail making an inquiry of a person who is willing to provide information and is in the best position to do so. It is not a matter of natural justice but bona fide inquiry and genuine decision making.’²⁵

This positive duty can be seen as extending further in particular circumstances to actively seeking a response from the relevant claimant.

In the recent case of Tuftevski v Total Risks Management Pty Ltd²⁶ Acting Justice Smart noted that the trustee in the case did not engage in genuine decision-making by not seeking from the claimant any information or response to various potentially adverse matters, in particular doctors’ reports and surveillance material. This case involved a disputed disablement claim where the trustee did not reveal adverse medical reports and surveillance reports to the member or provide him with an opportunity to respond to these reports.

The aspect of a positive duty to actually elicit responses from an affected person is very reminiscent of the duty to afford natural justice and leads to two further observations.

The first is the observation by Acting Justice Smart in Tuftevski to the effect that the principle in Karger v Paul should arguably not apply to decisions of superannuation trustees. His Honour discerned a need for legislative reform. Noting that the trustee had delegated its powers to a committee, he observed:

‘It is absurd that such a committee has a power which is substantially unreviewable in contested cases. It acts as both investigator and judge. Principles as to the exercise of the powers of a trustee borrowed from earlier days are inappropriate. What is required is a review of the merits and not the application of a system of trustee principles taken from bygone eras and different circumstances. The matter is far too important to employees and workers to be left in its present state. Their future and those of the families are at issue. The unfairness of the present system is highlighted by adverse decisions being made by the [committee] without the employee being told of all the material adverse to his application.’

The second observation is from Justice Campbell’s paper to the effect that the principle of natural justice is not necessarily excluded from the trust law arena. In commenting on the proposition that the principle of natural justice does not apply to trustee decisions, he said:

‘In my view that statement is too unequivocal. Rather, in my view the private law context in which trustees make their decisions usually does not give rise to an obligation to adhere to rules of natural justice. But that this is so is a matter of construction of the constitutive documents of the trust. It is not as though there is a rule of law that says that trustees never have to accord natural justice. Rather, it is just a matter of fact that the constituent documents of a trust rarely if ever impose an obligation for trustees to observe natural justice.’

Although the state of case law to date indicates that superannuation trustees are not technically bound by the rules of natural justice, it is interesting to note that recent cases and extra-judicial comments are leaning towards some aspects of natural justice being imposed on trustee decision-making processes.

Freehills update

• Natalie Gullifer’s article ‘Superannuation trends for employers in 2009’ has been published by Linex Legal.
• Michael Vrisakis has published the article ‘Is a superannuation trustee’s decision-making subject to natural justice?’ in the LexisNexis Financial Services Regulation and Compliance Newsletter, Volume 8 Number 2 2009.
• Peggy Haines has stepped down as a partner but will continue as a part-time consultant to the superannuation and funds management practices.

Endnotes

1. Tax Laws Amendment (2009 Budget Measures No. 1) Act 2009 (Cth)
2. Corporations Amendment (Improving Accountability on Termination Payments) Bill 2009
3. Tax Laws Amendment (2009 Measures No. 2) Act 2009 (Cth)
4. Superannuation Guarantee (Administration) Amendment Regulations 2009 (No 1)
5. Family Law (Superannuation) (Interest Rate for Adjustment Period) Determination 2009
6. Superannuation Industry (Supervision) Amendment Regulations 2009 (No. 4)
7. Exposure Draft of the Tax Laws Amendment (2009 Measures No. 6) Bill 2009 
8. Insight (Issue 2, 2009)
9. Valuation of unlisted assets – general principles for trustees
10. Typologies and Case Studies Report 2009
11. AUSTRAC Media release, ‘Report reveals new criminal tricks to commit financial crime’
12. SGR 2009/2A1 – Addendum to Superannuation Guarantee Ruling 2009/2
13. ASIC Media release, ‘Improved access to simple advice for superannuation fund members’
14. Regulatory Guide 200 Advice to super fund members
15. Regulatory Guide 175 Licensing: Financial product advisers – Conduct and disclosure)
16. Class Order 09/210 Intra-fund superannuation advice
17. Corporations Act section 949A
18. Class Order 05/1195 Simplified warning for oral general advice
19. Regulatory Guide 36 Licensing: Financial product advice and dealing
20. ASIC Class Order, [CO 09/437]
21. (1996) 41 ALD 127
22. (1984) VR 161
23. (3 April 2000), BC 2000 01407
24. Justice Campbell presented this paper at the Law Council of Australia’s Superannuation Conference of 2008.
25. Telstra Super Pty Ltd v Flegeltaub [2000] VSCA 180 at [30]
26. [2009] NSWSC 315

More information

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