Superannuation Update July 2007 — Recent developments

Contents

• Changes to in-use notice requirements
• Key changes in payment of reversionary pensions
• Product rationalisation
• Investment by superannuation funds in instalment warrants
• The Financial Sector Legislation Amendment (Simplifying Regulation and Review) Bill 2007
• Licensee’s compensation arrangements

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Changes to in-use notice requirements

Currently, an in-use notice must be lodged in respect of any product disclosure statement (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.

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Key changes in payment of reversionary pensions

Significant restructuring of various pensions will occur as part of the ‘Better Super’ reforms.

One key change which applies to all reversionary pensions from 1 July 2007 is the alteration to the reversionary beneficiary rules.

Where a pensioner dies on or after 1 July 2007, a reversionary pension may only be transferred to a dependant of the pensioner and, in the case of a child of the pensioner, only if the child is:

• under 18 years of age
• under 25 years of age and is financially dependent on the beneficiary, or
• of any age and disabled, as defined under the new SIS Regulations.

Product rationalisation

The Commonwealth Attorney-General has released an issues paper on product rationalisation and is calling for submissions on the paper to be lodged by 21 September 2007. Freehills is involved in making a submission on behalf of the Superannuation Committee of the Law Council.

Some of the main issues identified in the paper (and on which comments are sought) are as follows:

• Should product rationalisation be available on a one-off or ongoing basis?
• Should beneficiaries have the right to object to product rationalisation proposals?
• Should compulsory transfer of beneficiaries be allowed?
• Should an equivalent rights test be applied across products?
• How should product providers demonstrate that the ‘no-detriment’ test has been satisfied?
• What are the taxation implications?
• What information should be given to beneficiaries?
• What procedures should apply to lost members?
• How should complaints and compensation be dealt with?

The paper notes that in the interests of simplicity it would be desirable to have a consistent solution which applies to rationalisation of all financial products, including superannuation.

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Investment by superannuation funds in instalment warrants

Instalment warrants are an investment product which derive their value from an underlying asset (eg shares). The purchaser of the instalment warrant obtains a beneficial interest in the underlying asset and usually a right (but not an obligation) to purchase the underlying asset through a series of instalments. Once an initial instalment has been made, the purchaser may be entitled to income (eg dividends) from the underlying asset.

The Commissioner of Taxation and the Australian Prudential Regulation Authority (APRA) view instalment warrants as coming within the definitions of:

• borrowing, which is restricted for superannuation funds under section 67 of SIS, and
• in-house assets, which cannot make up more than five per cent of a superannuation fund’s total assets under section 71 of SIS.

The Tax Laws Amendment (2007 Measures No 4) Bill 2007 (Bill) was introduced into the House of Representatives on 21 June 2007. The Bill proposes a new section 67(4A) be inserted to allow a trustee of a regulated superannuation fund to borrow money if prescribed conditions which are commonly found in instalment warrant arrangements are met. Specifically, it is proposed that a trustee can borrow money where:

• the borrowed money is used to acquire an asset (original asset), or a replacement of the original asset, which the trustee is permitted by law to acquire and which is held on trust by the trustee
• the trustee acquires a beneficial interest in the original asset, or the replacement original asset
• the trustee acquires a right to obtain legal ownership of the original asset, or the replacement asset, by paying instalments, and
• the lender’s rights against the trustee in the event of default on borrowing, or against the trustee’s exercise of rights, are limited to the rights relating to the original asset, or the replacement asset.

Further, the Bill proposes to amend the application of the in-house asset limit under section 71 of SIS for instalment warrant arrangements if the only property of the related trust is the original or replacement asset described in section 67(4A). The asset will only be considered an in-house asset if it would have been an in-house asset if it were held directly by the trustee.

The Financial Sector Legislation Amendment (Simplifying Regulation and Review) Bill 2007

The Financial Sector Legislation Amendment (Simplifying Regulation and Review) Bill 2007 was introduced into the House of Representatives on 21 June 2007.

The main proposed amendments are described below:

• With regard to streamlining prudential regulation:
  • Reporting by a trustee of a superannuation entity of breaches to APRA is proposed to be amended to require only significant breaches to be reported to APRA as soon as practicable and, in any event, no later than 10 business days after the entity becomes aware of the breach. A significant adverse event will need to be notified to APRA in writing immediately. In certain circumstances, a single breach report may be able to be submitted to APRA for both ASIC and APRA.
  • Protection for whistleblowers is to be made more consistent.
  • APRA is given a new power to direct a trustee to remove an actuary.
  • APRA’s exemption and modification powers have been extended.
  • ABNs will replace RSE licence numbers.
• With regard to the provision of financial assistance to a superannuation fund in the event of fraudulent conduct or theft:
  • Under the amendments, a trustee can make application for financial assistance for all members at the time the loss was suffered, including former beneficiaries.
  • There is currently a stricter test for eligible loss to be compensated in a defined benefit fund as opposed to an accumulation fund. If an accumulation fund suffers from fraud or theft it may be eligible for financial assistance under the current arrangements. A defined benefit fund can only be eligible to have a loss compensated from fraudulent conduct or theft where an employer sponsor is unable to pay without becoming insolvent. The amendments propose that the defined benefit fund test be made consistent with the accumulation fund test.
  • It is proposed to clarify that an employer’s failure to pay contributions does not equate to an ‘eligible loss’.

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Licensee’s compensation arrangements

On 28 June 2007 the Corporations Amendment Regulations 2007 (No 6) were made. The Regulations, which commenced on 1 July 2007, specify the requirements for the arrangements a financial services licensee must have in place under section 912B of the Corporations Act 2001 to compensate persons for loss or damage suffered as a result of breaches of obligations within Chapter 7 of the Corporations Act.

A licensee, other than an exempt licensee, must hold professional indemnity insurance which complies with the adequacy requirements detailed in the Regulations, meaning that a licensee who is a trustee of a superannuation fund must have regard to:

• the potential liability the licensee might realistically be subject to by determination of the SCT, and
• key aspects of the licensee’s business, including the volume and kind of the business, the number and kind of members and the number of representatives of the licensee.

Existing licensees have until 1 July 2008 to comply with the new arrangements.

This new requirement may be a change for a trustee who currently either does not have indemnity insurance cover at all or who does not hold a policy of trustee indemnity insurance in its own name (eg where a group policy may be held by the principal employer-sponsor or financial services parent company).

For more information please contact

Name : Terry Brigden
Title : Partner
Office : Sydney
Phone : +61 2 9225 5535
Fax : +61 2 9322 4000
Email : terry.brigden@freehills.com

Name : David Cooper
Title : Partner
Office : Sydney
Phone : +61 2 9225 5392
Fax : +61 2 9322 4000
Email : david.cooper@freehills.com

Name : Natalie Gullifer
Title : Partner
Office : Melbourne
Phone : +61 3 9288 1497
Fax : +61 3 9288 1567
Email : natalie.gullifer@freehills.com

Name : Peggy Haines
Title : Partner
Office : Melbourne
Phone : +61 3 9288 1464
Fax : +61 3 9288 1567
Email : peggy.haines@freehills.com

Name : Andrew Shearwood
Title : Partner
Office : Perth
Phone : +61 8 9211 7509
Fax : +61 8 9211 7878
Email : andrew.shearwood@freehills.com

Name : Michael Vrisakis
Title : Partner
Office : Sydney
Phone : +61 2 9322 4411
Fax : +61 2 9322 4000
Email : michael.vrisakis@freehills.com