Superannuation Update December 2009

General update
The business of being a trustee – Reflections on the superannuation industry
Freehills update

General update

Termination payments

The Corporations Amendment (Improving Accountability on Termination Payments) Act 2009 (Cth)¹ received Royal Assent on 23 November 2009.This new Act introduces a requirement to obtain shareholder approval for termination benefits for company directors and executives which exceed one year’s average base salary.

The Senate resolved² not to insist on its proposed amendment to the Corporations Amendment (Improving Accountability on Termination Payments) Bill 2009. The amendment was moved by Senator Xenophon to set a three-year ‘sunset clause’ on the operation of provisions that provide exceptions to the requirement of member approval for benefits that do not exceed one year’s base salary. After this amendment was rejected by the House of Representatives on 29 October 2009, the Senate resolved not to insist on the amendment.

Employer superannuation action items for 2010

1. Termination Payments: Employers should review the Corporations Amendment (Improving Accountability on Termination Payments) Act 2009 (Cth) for its implications for director and executive superannuation arrangements.
2. Contribution caps: Employers should also consider whether they have adequately communicated the reduction in the concessional contributions cap to employees.³ Ultimately employers are not responsible for monitoring individual employee’s compliance with these caps. However, there may be instances where an employee makes excess contributions which causes difficulties in practice for the employer; for example, where the employer has been complicit in the breach by deducting large amounts of salary sacrifice contributions to be paid into superannuation.
   
   Each employer should review its communications to employees regarding the concessional contributions cap and its salary sacrifice arrangements in the light of the revised cap.
   
3. Superannuation Guarantee: Each employer should also review and monitor its superannuation guarantee contributions to ensure that the employer is complying with the Superannuation Guarantee (Administration) Act 1992 (Cth) requirements as detailed in Superannuation Guarantee Ruling 2009/2 Superannuation guarantee: meaning of the terms ‘ordinary time earnings’ and ‘salary or wages’ and SGR 2009/2A1 Addendum: superannuation guarantee: meaning of the terms ‘ordinary time earnings’ and ‘salary or wages’.⁴
   
   Depending on an employer’s remuneration arrangements, there may be considerable complexity in applying these recent Rulings in practice and care needs to be taken in reviewing payroll systems, policies and documentation to ensure ongoing compliance with the superannuation guarantee requirements.

CGT relief

The Tax Laws Amendment (2009 Measures No 6) Bill 2009⁵ has been referred⁶ to the Senate Economics Legislation Committee for inquiry and report by 25 February 2010. Schedule 2 to the Bill provides significant income tax relief to mergers between complying superannuation funds by permitting the roll-over of capital losses and transfer of revenue losses. The loss relief will be available for ‘complying superannuation funds and approved deposit funds that merge with a complying superannuation fund with five or more members’, as previously announced on 23 December 2008 and 29 April 2009.

This measure is to be available for mergers that occur on or after 24 December 2008 and before 1 July 2011.

Superannuation clearing house service

The Minister for Financial Services, Superannuation & Corporate Law and the Minister for Small Business have jointly announced that ‘the government will deliver its free superannuation clearing house service for small business through Medicare Australia’. According to the media release⁷, it is proposed that the clearing house service will be available for small businesses with less than 20 employees from July 2010.

Key features of the proposed superannuation clearing house include:

• superannuation contributions which a participating employer wishes to make to numerous funds will be electronically paid to the clearing house which will then process the transactions
• the legal obligation of participating small businesses to make superannuation contributions will be discharged when payment of the correct amount is made to the clearing house
• the clearing house facility will be free of charge to small businesses with less than 20 employees, and
• employers' choice of fund obligations will be managed by the clearing house.

It is proposed that the clearing house will be funded by the $16 million allocation made in the 2008-09 Budget, which funding will be reviewed at the end of three years. On 26 November, the Hon Chris Bowen MP released⁸ an Exposure Draft⁹ of the proposed legislation for public comment by 23 December 2009 (see also the Explanatory Memorandum¹⁰ for further details).

Unclaimed moneys

On 14 December 2009 the Tax Laws Amendment (2009 Budget Measures No. 2) Bill 2009 received Royal Assent, as Act no. 133 of 2009.

Schedule 3 of the Tax Laws Amendment (2009 Budget Measures No. 2) Act 2009¹¹ inserts a new part 4A into the Superannuation (Unclaimed Money and Lost Members) Act 1999 (Cth) which aims to ‘enhance efficiency’ and ‘address the growing problem of lost superannuation’ in the superannuation system by requiring superannuation providers to pay the ‘small’ and the ‘unidentifiable’ accounts of lost members to unclaimed monies. It is proposed that no additional obligations to locate lost members be imposed on superannuation providers.

Under the present scheme, superannuation providers are required to pay monies to the Commissioner of Taxation when a member reaches age 65 and cannot be found, when a member dies and the superannuation provider cannot ensure that the benefit can be paid to a person entitled to receive the benefit or in relation to a superannuation account of a former temporary resident.

Part 4A adds the new concept of a ‘lost member account’ where:

• the member is a lost member with an account balance less than $200 and the account does not support or relate to a defined benefit interest (small account), or
• ‘the provider has not received an amount in respect of the member within the last five years and the provider is satisfied, having regard to the information reasonably available to the provider, that it will never be possible for the provider to pay an amount to the member’ (inactive account of unidentifiable member).

This measure was announced in the 2009-10 Federal Budget and will apply in relation to the last unclaimed money day occurring before 1 July 2010.

Australian Super Pty Ltd v Woodward [2009] FCAFC 168

This case involved a disputed total and permanent disablement benefit.

The Superannuation Complaints Tribunal had affirmed the decision of the superannuation fund trustee and insurer to reject Mr Woodward’s claim for a total and permanent disablement benefit. Mr Woodward appealed to the Federal Court.

The Federal Court primary judge allowed the appeal on the ground that the Tribunal had conducted its review with reference to the wrong version of the superannuation fund trust deed. The primary judge stated that the relevant version of the trust deed in assessing a disablement claim was the deed in place at the time the trustee and the insurer rejected the claim. The trustee and the insurer appealed to the Full Federal Court.

On 1 December 2009, the Full Court of the Federal Court allowed the appeal and found in favour of the superannuation fund trustee and insurer. The court held that the relevant version of the trust deed in assessing Mr Woodward’s claim for a total and permanent disablement claim was the trust deed in place at the date that his claim for a disablement benefit arose, being the date upon which he was last employed by his employer Rexel.

In doing so, the Full Federal Court confirmed the recent decision of Howitt-Steven v Unisuper Ltd (2002) 193 ALR 207 and Auspine Staff Superannuation Pty Ltd v Henderson (2007) ANZ Ins Cas 90-127 in finding that ‘the reference date for the “relevant definition inquiry” should be [the] date on which the TPD arose’, finding:

The outcomes in Auspine and Howitt-Smith are each also consistent with the general equitable principle … which would deny efficacy to any trust deed amendment which sought to interfere with rights already accrued under the terms of that trust deed.

Accordingly, this decision helpfully clarifies the law on an issue which has caused difficulty in a number of other cases.

The business of being a trustee - Reflections on the superannuation industry

The global financial crisis and the increasing importance of our savings for retirement have led to the current focus by the Federal Government on review of our superannuation arrangements.

Below we provide a brief summary of the three main government reviews in progress currently.

Cooper Review

The Review into the governance, efficiency, structure and operation of Australia's superannuation system (Cooper Review) is conducting a review based on a ‘three-phased consultation’ approach. According to its Terms of Reference¹², two central themes for the Cooper Review are the best interests of the member and the maximising of retirement incomes for Australians.

• The Phase One Governance Issues Paper 25 August 2009¹³ focuses on the fiduciary trustee model for superannuation, trustee duties and disclosure, government regulation and operational investment issues.
• The Phase Two Operation and Efficiency Issues Paper 16 October 2009¹⁴ focuses on efficiency in the design and the architecture of the superannuation industry with the aim of maximising returns for members. There is a particular focus on fees, charges and commissions.
• The Phase Three Structure Issues Paper 14 December 2009¹⁵ focuses on the manner in which the superannuation industry is organised and integrity of the superannuation system, addressing the implications of choice of fund, defined benefit funds, retirement savings accounts and insurance issues.

On 14 December 2009, the Cooper Review released Media Release: A new member-oriented model for super? Super System Review releases governance phase preliminary report¹⁶ and its preliminary report on governance issues Clearer Super Choices: Matching Governance Solutions Phase One – Preliminary Report 14 December 2009.¹⁷ This Report details the current thinking of the Review Panel on governance issues and some of its recommendations are discussed below under the heading Current Recommendations.

The emerging themes recognised by the Panel to date include:

• Superannuation is not like other financial products; it is different and superannuation should have some special rules. 
• Governance is intrinsically linked to operational and structural issues in the superannuation system. Flexibility in the superannuation system is necessary to deal with differing members’ requirements.
• While Australia’s superannuation system has demonstrated ‘substantial resilience’, changes need to be made to ensure that the superannuation system is ready to meet the new challenges which lie ahead.

Henry Review

The Review into Australia’s Future Tax System (Henry Review) is a broad tax based review which will ‘examine¹⁸ and make recommendations to create a tax structure that will position Australia to deal with the demographic, social, economic and environmental challenges of the 21st century and enhance Australia's economic and social outcomes’.

The Cooper Review Phase Three Issues Paper notes that the Henry Review is ‘considering the types of products available and the appropriate role for government in assisting with the development of products which insure against longevity risk’ but asks the industry whether more should be done to:

• address financial risk in retirement, and
• ensure that post-retirement assets are not invested too conservatively?

The Henry Review is charged with recommending a stable policy framework which will minimise change in our superannuation arrangements in the future. In a similar vein, the Cooper Review Panel ‘sees reducing complexity and providing a stable regulatory foundation as key goals’ but considers that ‘there is no single measure that can achieve this’.

The Henry Report is to be delivered to the Treasurer by the end of December 2009. The Report is expected to be released to the public in the first quarter 2010.

Ripoll Review

On 23 November 2009 Mr Bernie Ripoll MP as Chairman of the Parliamentary Joint Committee on Corporations and Financial Services tabled its Report into Financial Products and Services in Australia¹⁹ (Ripoll Report) which proposed 11 recommendations for legislative reform ‘designed to enhance professionalism within the financial advice sector and enhance consumer confidence and protection’. The quality of advice and the link between product manufacturers and sales people and advisers, with potential conflicts of interest, recur as themes throughout the Report.

While the full impact of the Ripoll Report will not be known until the government delivers its formal response, present indications are that the recommendations have been positively received.

The Minister for Financial Services, Superannuation and Corporate Law has embraced the Report as a ‘welcome contribution’ to the discussion on the future direction of the financial advice industry. In particular, the Minister restated in his release²⁰ that any regulatory changes will be guided by two key principles:

• financial advice given to people must be in their best interests; this requires that distortions to remuneration, which misalign the best interests of the client and the adviser, should be minimised, and
• financial advice remains accessible to those who need it.

In the light of the Ripoll Report, the Cooper Review has announced its intention to ‘gather more data and other information [on the role of financial advisers] rather than raising issues for comment and submissions at this stage. This will enable the Review to do some further analysis on how advice would fit into the proposed choice architecture model’ discussed in the 14 December 2009 Clearer Super Choices Report.

Current recommendations and ideas from the reviews

Following are the relevant highlights from the Reviews so far.

1. Financial advisers operating under an Australian financial services licence should be subject to a statutory fiduciary duty (Recommendation 1 of Ripoll Report)
   
   The Ripoll Report concluded that there is ‘no reason why advisers should not be required to meet this professional standard, nor is there any justification for the current arrangement whereby advisers can provide advice not in their clients’ best interests, yet comply with section 945A of the Corporations Act’.
   
   The Cooper Review Clearer Super Choices Report notes that the Panel is ‘working towards a clarification of which participants in the system are “fiduciaries” and the consequences that designation should attract in each case’.
   
2. Advisers should disclose any potential conflicts of interest prominently in marketing materials (Recommendation 3 of Ripoll Report)
   
   While the Ripoll Report recognised the limitations of a disclosure regime in dealing with conflicts of interest, the Report argued that disclosure in marketing materials should be improved, particularly in the case of vertically integrated financial institutions, and supported present efforts to simplify and shorten disclosure materials.
   
   The Cooper Review Clearer Super Choices Report notes that there is a need for ‘greater focus on the mechanisms for dealing with conflicts throughout the system’ and that ‘disclosure to members is not an adequate response’.
   
3. Consultation should be undertaken to develop better remuneration structures (Recommendation 4 of the Ripoll Report)
   
   The Ripoll Report noted that remuneration structures for financial advisers which are incompatible with the proposed fiduciary duty should be removed. The Ripoll Report received many submissions advocating the banning of commission payments. The Report stated at paragraph 6.100:
   
   ‘The committee notes that remuneration structures that are incompatible with a financial adviser’s proposed fiduciary duty … should be removed. The committee acknowledges that some in the industry have already indicated a willingness to move away from commission-based remuneration practices. The committee welcomes this and recommends that government consult with and support industry in effecting this transition’.
   
   This is a contentious issue and those in favour of commissions argue that banning commissions may make financial advice unaffordable for consumers.
   
   In light of concerns that changes to the remuneration structure of the financial advice industry could adversely impact the affordability of advice, the Ripoll Report also suggested that the government consider the implications of making the cost of financial advice tax deductible.
   
4. ASIC should be granted powers to ban individuals (Recommendation 6 of the Ripoll Report)
   
   The Ripoll Committee agreed with ASIC’s submission that ASIC’s powers under section 920A of the Corporations Act should be enhanced to make it easier for ASIC to ban individuals from the financial services industry.
   
5. ASIC should be better resourced (Recommendation 2 of the Ripoll Report)
   
   Consistent with the theme of inadequate enforcement of existing laws, the Ripoll Committee expressed the view (at paragraph 6.32) that ‘ASIC needs to undertake the enforcement of legislative standards of advice with a more rigorous and targeted approach’. 
   
6. A choice architecture model should be adopted for better governance of superannuation (Cooper Review Clearer Super Choices Report item 5)
   
   This suggestion is a radical new design for the classification of members which ‘orients attention towards members and away from “products” and industry sectors’ and ‘uses the conscious choices of individuals to calibrate the levels of governance, regulation and member protection available’.
   
   The proposed classification is as follows:
   • Disconnected members (such as those now in eligible rollover funds) will receive the highest level of protection with low cost minimal facilities and a conservative investment strategy. 
   • Universal members (those who have not made an ‘express choice’) will receive the same protection as currently provided based on traditional trustee duties with a single diversified investment strategy, some insurance options but limited advice options because of the limited choices the member has elected to exercise and because ‘advice is “embedded” in the product’. This will be a ‘simpler and cheaper option for members’.
   • Choice members are those who have demonstrated a desire to be involved in their superannuation; their fund could have potentially unlimited investment and insurance options. These members will rely on effective disclosure and will bear substantial responsibility for investment choices.
   • Self managed superannuation which will remain subject to minimum standards. This sector is the subject of the Cooper Review’s Third Phase.

   The Report notes that the advantages of this proposed classification are that it accords with the individual’s choice, resolves ambiguity regarding a trustee’s responsibility for investment choices made by a member and, most importantly, ‘facilitates more precise allocation of costs to members’. Members would be able to move between different segments of the superannuation system.
   
   The Clearer Super Choices Report also advocates clarification of trustee duties (particularly with respect to member directed investment). There is recognition that trustee duties may differ with respect to ‘universal’ members and ‘choice’ members ‘in important respects’. The trust model is accepted as the appropriate structure by the Panel.
   
   Further, the Cooper Review Panel notes that it is ‘considering alternative ways to make trustees of super funds more directly accountable to members’ which may include requiring a superannuation fund trustee to give reasons for its decisions in relation to a member complaint.

7. APRA-regulated superannuation funds should be subject to the same governance standards as listed companies (Cooper Review Clearer Super Choices Report item 6.1)
   
   This may mean that a code of practice similar to that for listed companies (under Australian Securities Exchange Corporate Governance Council’s Principles and Recommendations 2nd edition August 2007) is adopted for trustees of superannuation funds, incorporating the ‘if not, why not’ disclosure regime.
   
   Further, the Clearer Super Choices Report suggests that there could be a possible ‘regulatory prescription of a certain knowledge and level of skills for all directors within a short period of joining a trustee board’ and a mandated annual performance review or appraisal of trustee directors and senior management.

Freehills update

• Michael Vrisakis’ article ‘The true nature of a fiduciary obligation in the context of advisers’ duties’ was published in the Butterworths Financial Services Newsletter Volume 8 Number 6 November–December 2009.
• An article by Michael Vrisakis and Sarah Yu ‘Protection for innocent directors – the story of Bunyip Bluegum and the Pudding Thieves Committee’ was published in the Australian Superannuation Law Bulletin Volume 21 Numbers 4 & 5 November–December 2009.
• In the same edition, Marlene Hewer’s article ‘Fraud and super: the regulatory tensions’ was published in the Australian Superannuation Law Bulletin Volume 21 Numbers 4 & 5 November–December 2009.

If you do not currently receive our weekly Superannuation Alert and you would like to do so in 2010, please let us know.

Endnotes

1. Corporations Amendment (Improving Accountability on Termination Payments) Act 2009 (Cth) 
2. Senate, Official Hansard, No. 13, 2009, Monday, 16 November 2009
3. Superannuation Update June 2009 
4. Superannuation Update June 2009 and Superannuation Update August 2009
5. Tax Laws Amendment (2009 Measures No 6) Bill 2009
6. Selection of Bills Committee - Report No. 18 for 2009
7. Media Release: ‘Cutting Red Tape for Small Business - Superannuation Clearing House Service’
8. Media Release: ‘Superannuation Clearing House – Release of Draft Legislation’
9. Exposure Draft – Tax Laws Amendment (2010 Measures No 1) Bill 2010
10. Explanatory Memorandum – Tax Laws Amendment (2010 Measures No 1) Bill 2010
11. Tax Laws Amendment (2009 Budget Measures No. 2) Act 2009 (Cth)
12. Cooper Review Terms of Reference
13. Phase One Governance Issues Paper 25 August 2009
14. Phase Two Operation and Efficiency Issues Paper 16 October 2009
15. Phase Three Structure Issues Paper 14 December 2009
16. Media Release: ‘A new member-oriented model for super? Super System Review releases governance phase preliminary report’
17. Clearer Super Choices: Matching Governance Solutions Phase One – Preliminary Report 14 December 2009
18. Henry Review Terms of Reference
19. Parliamentary Joint Committee on Corporations and Financial Services – Inquiry into financial products and services in Australia
20. Media Release: ‘Government Welcomes Report into Financial Services & Products’

More information

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